TELUS reports strong results for third quarter 2016
VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 11/04/16 -- (TSX: T)(NYSE: TU) -
Consolidated operating revenue up 2.6 per cent and EBITDA up 5.8 per cent
Strong customer loading in all key segments with 115,000 net new postpaid wireless, Internet and TELUS TV customer additions
Industry-leading wireless monthly postpaid churn of 0.94 per cent, ARPU growth of 3.8 per cent and best-in-class lifetime revenue per client of $5,650
Quarterly dividend increased to $0.48 per share - twelfth dividend increase since multi-year 10 per cent per annum dividend growth program commenced in May 2011
TELUS Corporation's consolidated operating revenue grew 2.6 per cent to $3.2 billion in the third quarter of 2016 from a year earlier, reflecting higher data revenue and subscriber growth in both wireless and wireline operations. Earnings before interest, income taxes, depreciation and amortization (EBITDA) increased by 5.8 per cent to $1.1 billion. When excluding net gains and equity income related to real estate joint venture developments in the third quarter of 2016, as well as restructuring and other costs from both reporting periods, adjusted EBITDA was up 5.5 per cent to $1.2 billion. This growth reflects higher wireless and wireline revenue, as well as ongoing execution of operational efficiency and effectiveness initiatives.
"TELUS' third quarter results reflect the company's strong and disciplined performance across both our wireless and wireline operations," said Darren Entwistle, President and CEO. "Our team once again delivered industry-leading results in wireless customer loyalty, ARPU growth and lifetime-revenue, as well as strong consolidated and segmented revenue and EBITDA growth. Importantly, these results are underpinned by a highly dedicated TELUS team that is committed to consistently providing exceptional customer experiences."
"This strong performance underscores TELUS' unique ability to return capital to investors through growing dividends, while simultaneously funding significant strategic growth investments. TELUS announced its twelfth dividend increase in the past six years as part of our multi-year, 10 per cent per annum dividend growth program launched in May 2011. Our consistent long-term track record of providing industry-leading shareholder-friendly initiatives is reflected in TELUS now having returned $13.6 billion to shareholders, including $8.4 billion in dividends and $5.2 billion in share purchases, representing $23 per share between 2004 and October 2016. This track record, combined with our strong operational results, further buttresses our next three-year capital return program targeted for 2017 through 2019," Mr. Entwistle added.
Doug French, Executive Vice-President and CFO said, "TELUS' third quarter results reflect the quality of TELUS' asset base as we delivered healthy margin expansion in both wireless and wireline, along with strong subscriber growth. These results also reflect the benefits of our ongoing efficiency and effectiveness programs, highlighting our commitment to making smart investments that drive ongoing improvements in customer experience, and accelerate future cash flow generation. Anchored by our strong balance sheet, we remain focused on our generational investments in broadband technologies to drive continued growth, future-proof our network and deliver on our shareholder return initiatives."
In wireless, higher data revenue was driven by a larger proportion of higher-rate two-year plans in the revenue mix, increased adoption of larger data buckets, continued subscriber growth, a more favourable postpaid subscriber mix, and increased data usage from the continued adoption of higher-end smartphones and other data-centric wireless devices, as well as greater use of data-intensive applications. Wireline data revenue growth was generated by growth in business process outsourcing revenues, an increase in Internet, TV and enhanced data service revenues from continued high-speed Internet and TV subscriber growth and higher revenue per customer.
In the quarter, TELUS attracted 115,000 net wireless postpaid, high-speed Internet and TV customers, up 23,000 sequentially over the second quarter of 2016. Net additions in the quarter included 87,000 wireless postpaid customers, 14,000 high-speed Internet subscribers, and 14,000 TELUS TV customers. These gains were partially offset by the ongoing loss of traditional telephone network access lines and a decline in wireless prepaid customers. TELUS' total wireless subscriber base of over 8.5 million is up 1.0 per cent from a year ago, reflecting a 2.4 per cent increase in the postpaid subscriber base to 7.5 million. TELUS' high-speed Internet connections have increased 5.6 per cent to 1.6 million, while TELUS TV subscribers are higher by 6.4 per cent to over 1 million.
TELUS' continued focus on executing on its top corporate priority of putting customers first was demonstrated by delivering an industry-leading wireless monthly postpaid churn rate of 0.94 per cent. This is the twelfth quarter in the past 13 quarters that TELUS' postpaid churn rate has been below the 1 per cent level. Blended churn of 1.18 per cent in the third quarter of 2016 is among TELUS' lowest quarterly churn rates since becoming a national carrier 16 years ago.
CONSOLIDATED FINANCIAL HIGHLIGHTS
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Three months ended
C$ and in millions, except per share amounts September 30 Per cent
(unaudited) 2016 2015 change
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Operating revenues 3,238 3,155 2.6
Operating expenses before depreciation and
amortization 2,107 2,087 1.0
EBITDA(1) 1,131 1,068 5.8
EBITDA excluding restructuring and other
costs(1)(2) 1,191 1,119 6.4
Adjusted EBITDA(1)(2)(3) 1,181 1,119 5.5
Net income 355 365 (2.7)
Net income attributable to common shares 348 365 (4.7)
Adjusted net income(4) 383 398 (3.8)
Basic earnings per share (EPS) 0.59 0.61 (3.3)
Adjusted basic EPS(4) 0.65 0.66 (1.5)
Capital expenditures 787 623 26.3
Free cash flow(5) 98 310 (68.4)
Total subscriber connections(6) 12.577 12.436 1.1
(1) EBITDA is a non-GAAP measure and does not have any standardized meaning
prescribed by IFRS-IASB. TELUS issues guidance on and reports EBITDA
because it is a key measure used to evaluate performance at a
consolidated and segmented level. For further definition and explanation
of this measure, see Section 11.1 in the accompanying 2016 third quarter
Management's discussion and analysis.
(2) For the third quarter of 2016 and 2015, restructuring and other costs
were $60 million and $51 million respectively.
(3) Adjusted EBITDA for the third quarter of 2016 excludes:1) net gains and
equity income of $10 million related to real estate joint venture
developments; and 2) restructuring and other costs of $60 million.
(4) Adjusted net income and Adjusted basic EPS are non-GAAP measures and do
not have any standardized meaning prescribed by IFRS-IASB. These terms
are defined in this news release as excluding from net income
attributable to common shares and basic EPS (after income taxes), 1) net
gains and equity income from real estate joint venture developments in
the third quarter of 2016; 2) restructuring and other costs in the third
quarter of 2016 and 2015; and 3) favourable income tax-related
adjustments in the third quarter of 2016 and 2015. For further analysis
of Adjusted net income and Adjusted basic EPS see Section 1.3 in the
accompanying 2016 third quarter Management's discussion and analysis.
(5) Free cash flow is a non-GAAP measure and does not have any standardized
meaning prescribed by IFRS-IASB. For definition and explanation of this
measure, see Section 11.1 in the accompanying 2016 third quarter
Management's discussion and analysis.
(6) The sum of active wireless subscribers, residential network access lines
(NALs), high-speed Internet access subscribers and TELUS TV subscribers
(Optik TV" and TELUS Satellite TV� subscribers) measured at the end
of the respective periods based on information in billing and other
systems. Our January 1, 2015 opening reported subscriber balance has
been retrospectively adjusted to exclude 1,613,000 business NALs due to
its diminishing relevance as a key performance indicator. Subsequent to
a review of our subscriber base, TELUS' Q1 2016 beginning of period
postpaid wireless subscriber base was reduced by 45,000 and its Q1 2016
beginning of period high-speed Internet subscriber base was increased by
21,000.
Net income of $355 million and basic earnings per share (EPS) of $0.59 were lower by 2.7 and 3.3 per cent, respectively, over the same period a year ago as higher EBITDA was offset primarily by higher depreciation and amortization expenses and increases in financing costs and income tax expense.
Free cash flow of $98 million in the third quarter was lower by $212 million from a year ago, primarily due to higher income taxes paid and capital expenditures, partially offset by adjusted EBITDA growth.
In the third quarter of 2016, TELUS returned $293 million to shareholders including $274 million in dividends paid and $19 million in share purchases under its 2016 normal course issuer bid (NCIB) program. Through the end of October, TELUS has returned $1.2 billion to shareholders this year, including $1.07 billion in dividends paid and the purchase of approximately 3.35 million shares for $130 million.
Subsequent to September 30, 2016, TELUS made commitments to pay lump-sum amounts totaling approximately $300 million (inclusive of amounts proposed in an unratified tentative agreement), in respect of immediately-vesting, transformative compensation expense to the majority of its existing unionized and non-unionized Canadian-sited workforces; a portion of the net-of-tax amount for certain lump-sum recipients will be paid in Common Shares purchased in the market. If the tentative agreement is ratified, there will be a one-time payment to these unionized members in the fourth quarter of 2016. This payment represents increases that would have been otherwise awarded July 1, 2016, 2017 and 2018 (a period of 30 months) and compensation in consideration of collective agreement concessions that underpin future productivity improvements. A similar approach with respect to salary increases has been adopted for management employees. For most of TELUS' current Canadian-sited management employees, there will be a one-time payment in the fourth quarter of 2016 in lieu of general salary increases for 2017 and 2018. The next salary increases will be awarded in 2019.
Dividend Declaration - increased to 48 cents per quarter, up four cents from a year ago
The TELUS Board of Directors has declared a quarterly dividend of 48 cents ($0.48) Canadian per share on the issued and outstanding Common Shares of the Company payable on January 3, 2017 to holders of record at the close of business on December 9, 2016.
This fourth quarter dividend represents a four cent increase from the $0.44 quarterly dividend paid on January 4, 2016.
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- This news release contains statements about financial and operating performance of TELUS (the Company) and future events, including with respect to future dividend increases and normal course issuer bids through 2019, the 2016 annual targets and guidance that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and predictions and are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. The forward-looking statements contained in this news release describe our expectations at the date of this news release and, accordingly, are subject to change after such date. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future performance and events to differ materially from those expressed in the forward-looking statements. Accordingly, this news release is subject to the disclaimer and qualified by the assumptions (including assumptions for the 2016 annual targets and guidance, semi-annual dividend increases through 2019 and our ability to sustain and complete our multi- year share purchase program through 2019), qualifications and risk factors referred to in the accompanying third quarter Management's discussion and analysis and in the 2015 annual report, and in other TELUS public disclosure documents and filings with securities commissions in Canada (on SEDAR at sedar.com) and in the United States (on EDGAR at sec.gov). Except as required by law, TELUS disclaims any intention or obligation to update or revise forward-looking statements, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance. ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Third Quarter 2016 Operating Highlights
TELUS wireless
-- Wireless network revenues increased by $79 million or 4.9 per cent year-
over-year to $1.7 billion. This growth was driven by an increase in data
revenue due to a larger proportion of higher-rate two-year plans in the
revenue mix, increased adoption of larger data buckets, subscriber
growth, a more favourable postpaid subscriber mix, and increased data
usage from the continued adoption of higher-end smartphones and other
data-centric wireless devices. This growth was partially offset by the
ongoing decline in voice revenue from increased adoption of unlimited
nationwide voice plans and continued but moderating substitution to data
services.
-- Blended ARPU was higher by 3.8 per cent to $66.67. This represents
TELUS' twenty-fourth consecutive quarter of year-over-year growth. The
growth was driven by data network revenue growth as described above.
-- Monthly postpaid subscriber churn of 0.94 per cent improved by three
basis points year-over-year. The decline reflects our customers first
focus and retention programs, partly offset by competitive intensity and
the effects of the economic slowdown, particularly in Alberta. Blended
monthly churn improved by 10 basis points to 1.18 per cent reflecting
improvements in both postpaid and prepaid churn rates.
-- Postpaid net additions of 87,000 were higher year-over-year by 18,000
due to higher gross additions, reflecting the success of targeted
promotions and marketing efforts, and lower churn. Total wireless net
additions of 80,000 were higher by 11,000 over a year ago as higher
postpaid net additions were slightly offset by higher prepaid losses of
7,000.
-- Adjusted wireless EBITDA (EBITDA excluding the net gains and equity
income from real estate joint venture developments, as well as
restructuring and other costs) increased by $44 million or 6.1 per cent
over last year to $773 million. The growth reflects higher network
revenue as well as ongoing operational efficiency and effectiveness
initiatives, partly offset by higher acquisition and retention spending
reflecting higher per-unit subsidies due to customer preference for
higher-value smartphones and competitive intensity.
-- Wireless EBITDA less capital expenditures decreased year-over-year by
$42 million to $464 million as higher EBITDA was offset by higher
capital expenditures. Capital expenditures increased over the same
period a year ago due to ongoing investments in TELUS' fibre-optic
network to support its small-cell technology strategy to improve
coverage and prepare for a more efficient and timely evolution to 5G, as
well as increased investment on the deployment of 700 MHz and 2500 MHz
spectrum licences.
TELUS wireline
-- External wireline revenues increased by $32 million or 2.3 per cent to
$1.4 billion. This growth was generated primarily by higher data service
and equipment revenue.
-- Data service and equipment revenues increased by $75 million or 7.9 per
cent, due to growth in business process outsourcing services, higher
Internet and enhanced data revenues from continued high-speed Internet
subscriber growth and higher revenue per customer, and higher TELUS TV
revenues from continued subscriber growth and higher revenue per
customer.
-- High-speed Internet net additions of 14,000 were down 10,000 from the
same quarter a year ago, reflecting heightened competitive intensity and
the impact of the economic slowdown, leading to lower gross additions
and a higher customer churn rate. This was partly offset by the ongoing
expansion of TELUS' high-speed broadband footprint, including fibre-to-
the-premises, and the pull-through effect of bundling with Optik TV.
-- Total TV net additions of 14,000 were lower by 12,000 over the same
quarter a year ago, as a result of lower gross additions, a higher
customer churn rate and a decline in satellite subscribers due to the
effects of heightened competitive intensity including OTT services,
slower subscriber growth for paid TV services, the economic slowdown,
and a high rate of market penetration for TV services. These factors
were partly offset by the ongoing expansion of our addressable high-
speed broadband footprint and increasing broadband speeds.
-- Residential network access lines (NALs) declined by 25,000 in the
quarter, consistent with the decline in the same quarter a year ago.
Residential NAL losses continue to reflect the ongoing trend towards
wireless and Internet substitution, partly mitigated by the success of
TELUS' bundled service offerings.
-- Adjusted wireline EBITDA (EBITDA excluding the net gains and equity
income from real estate joint venture developments as well as
restructuring and other costs) increased by $18 million or 4.2 per cent
over last year to $408 million. Adjusted EBITDA would have been up 5.8
per cent had certain business acquisition-related provisions been
excluded. The improvement reflects execution on operating efficiency and
effectiveness initiatives, as well as improving margins in data
services, including Internet, business process outsourcing services,
TELUS TV, and TELUS Health services.
-- Wireline EBITDA less capital expenditures decreased by $59 million to
$(120) million as higher EBITDA was more than offset by higher capital
expenditures that support TELUS' long-term growth. Capital expenditures
increased over the same period a year ago due to continued strategic
investments in broadband network infrastructure, including connecting
more homes and businesses directly to TELUS' fibre-optic network and
investments in system and network resiliency and reliability.
Corporate Highlights
TELUS makes significant contributions and investments in the communities where team members live, work and serve and to the Canadian economy on behalf of customers, shareholders and team members by:
-- Paying, collecting and remitting a total of approximately $1.8 billion
in taxes during the first nine months of 2016 to federal, provincial and
municipal governments in Canada consisting of corporate income taxes,
sales taxes, property taxes, employer portion of payroll taxes and
various regulatory fees. Since 2000, the Company has remitted more than
$20 billion in these taxes.
-- Disbursing spectrum renewal fees of $53 million to Innovation, Science
and Economic Development Canada (formerly Industry Canada) during the
first nine months of 2016. Since 2002, TELUS' total tax and spectrum
remittances to federal, provincial and municipal governments in Canada
have totaled more than $25 billion.
-- Investing $2.2 billion in capital expenditures primarily in communities
across Canada in the first nine months of 2016 and more than $30 billion
since 2000.
-- Spending $5.6 billion in total operating expenses in the first nine
months of 2016, including goods and service purchased of $3.9 billion.
Since 2000, TELUS has spent $97 billion and $64 billion respectively in
these areas.
-- Generating a total team member payroll of $2.1 billion in the first nine
months of 2016, including payroll taxes of $118 million. Since 2000,
total team member payroll totals $39 billion.
-- Paying $1.07 billion in dividends in 2016 through the end of October to
individual shareholders, mutual fund owners, pensioners and
institutional investors, and purchasing approximately 3.35 million
shares for $130 million on behalf of shareholders under TELUS' multi-
year share purchase program.
-- Returning $13.6 billion to shareholders through TELUS' dividend and
share purchase programs from 2004 to the end of October 2016, including
$8.4 billion in dividends and $5.2 billion in share buybacks,
representing $23 per share.
About TELUS
TELUS (TSX: T)(NYSE: TU) is Canada's fastest-growing national telecommunications company, with $12.7 billion of annual revenue and 12.6 million subscriber connections, including 8.5 million wireless subscribers, 1.6 million high-speed Internet subscribers, 1.4 million residential network access lines and more than 1.0 million TELUS TV customers. TELUS provides a wide range of communications products and services, including wireless, data, Internet protocol (IP), voice, television, entertainment and video, and is Canada's largest healthcare IT provider.
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed $440 million to charitable and not-for-profit organizations and volunteered more than 6.8 million hours of service to local communities since 2000. Created in 2005 by President and CEO Darren Entwistle, TELUS' 12 Canadian community boards and 5 International boards have led the Company's support of grassroots charities and have contributed more than $54 million in support of over 4,900 local charitable projects, enriching the lives of more than 2 million children and youth, annually. TELUS was honoured to be named the most outstanding philanthropic corporation globally for 2010 by the Association of Fundraising Professionals, becoming the first Canadian company to receive this prestigious international recognition.
For more information about TELUS, please visit www.telus.com.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings news release, management's discussion and analysis, quarterly results slides, audio and transcript of the investor webcast call, supplementary financial information, and our full 2015 annual report at telus.com/investors.
TELUS' third quarter 2016 conference call is scheduled for Friday, November 4, 2016 at 10:00am ET (7:00am PT) and will feature a presentation followed by a question and answer period with investment analysts. Interested parties can access the webcast at telus.com/investors. A telephone playback will be available on November 4 until December 15, 2016 at 1-855-201-2300. Please use reference number 1206674# and access code 77377#. An archive of the webcast will also be available at telus.com/investors and a transcript will be posted on the website within a few business days.
TELUS CORPORATION
Management's discussion and analysis
2016 Q3
Caution regarding forward-looking statements
This document contains forward-looking statements about expected events and the financial and operating performance of TELUS Corporation. The terms TELUS, the Company, we, us and our refer to TELUS Corporation and where the context of the narrative permits or requires, its subsidiaries. Forward-looking statements include statements relating to annual targets, outlook, updates, our multi-year dividend growth program, our multi-year share purchase program and trends. Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, strategy, target and other similar expressions, or future or conditional verbs such as aim, anticipate, believe, predict, could, expect, intend, may, plan, seek, should, strive and will. By their nature, forward-looking statements do not refer to historical facts, are subject to inherent risks and require us to make assumptions. Our assumptions are presented in Section 9 General trends, outlook and assumptions in our Management's discussion and analysis (MD&A) for 2015 and updated in Section 9 Update to assumptions in this MD&A. There is significant risk that forward-looking statements will not prove to be accurate. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements.
Factors that could cause actual performance to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to, the following:
-- Competition including: continued intense rivalry across all services
among wireless and wireline telecommunications companies, cable-TV
providers, other communications companies and over-the-top (OTT)
services, which, among other things, places pressures on average revenue
per subscriber unit per month (ARPU) and churn for all services; mergers
and acquisitions of industry competitors; our ability to continue to
retain customers through an enhanced customer service experience;
pressures on wireless ARPU and churn from market conditions and
government actions, customer usage patterns, flat-rate pricing trends
for voice and data, inclusive long distance plans for voice and
increasing availability of Wi-Fi networks for data; pressures on high-
speed Internet and TV ARPU and churn resulting from market conditions,
government actions and customer usage patterns; residential and business
network access line (NAL) losses; subscriber additions and retention
volumes, and associated costs for wireless, TV and high-speed Internet
services; our ability to obtain and offer content on a timely basis
across multiple devices on wireless and TV platforms at a reasonable
cost; and competition from global players for international roaming
services.
-- Technological substitution including: reduced utilization and increased
commoditization of traditional wireline voice local and long distance
services from impacts of OTT applications and wireless substitution, an
overall slower market growth for high-speed Internet access (HSIA)
services and an overall market contraction for TV services; the
increasing number of households that have only wireless and/or Internet-
based telephone services; continuation of wireless voice ARPU declines
as a result of, among other factors, substitution to messaging and OTT
applications; substitution to increasingly available Wi-Fi services from
wireless services; and disruptive technologies such as OTT Internet
protocol (IP) services that may displace our services including TV and
entertainment services, and impact revenue.
-- Technology including: subscriber demand for data that may challenge
wireless networks and spectrum capacity levels in the future; our
reliance on legacy systems and information technology; technology
options, evolution paths and roll-out plans for wireless and wireline
networks (including broadband initiatives, such as fibre to the premises
(FTTP), wireless small-cell deployment, 5G wireless and availability of
resources and ability to build out adequate broadband capacity); our
reliance on wireless network access agreements; choice of suppliers and
those suppliers' ability to maintain and service their product lines;
supplier concentration and market power for network equipment, TELUS TVr
and wireless handsets; the performance of wireless technology; our
expected long-term need to acquire additional spectrum capacity through
future spectrum auctions and from third parties to address increasing
demand for data; deployment and operation of new wireless networks and
success of new products, new services and supporting systems, including
the Internet of Things (IoT) services for Internet-connected devices;
deployment and operation of new wireline broadband networks at a
reasonable cost and availability, and success of new products and
services to be rolled out on such networks; network reliability and
change management; timing of decommissioning of certain legacy wireline
networks, systems and services to reduce operating costs; and success of
upgrades and evolution of TELUS TV technology, which depend on third-
party suppliers.
-- Ability to successfully implement cost reduction initiatives and realize
planned savings, net of restructuring and other costs, without losing
customer service focus or negatively affecting business operations.
Initiatives include: our operating efficiency and effectiveness program
to drive improvements in earnings before interest, income taxes,
depreciation and amortization (EBITDA); business integrations; business
process outsourcing; offshoring and reorganizations, including any FTE
employee reduction programs; procurement initiatives; and real estate
rationalization. Additional revenue and cost efficiency and
effectiveness initiatives will continue to be assessed and implemented,
as required.
-- Economic growth and fluctuations including: the state of the economy in
Canada, which may be influenced by economic and other developments
outside of Canada; future interest rates; inflation; unemployment
levels; effects of low oil prices; effects of low business spending
(such as reducing investments and cost structure); pension investment
returns, funding and discount rates; and Canadian/U.S. dollar exchange
rates.
-- Capital expenditure levels and potential outlays for spectrum licences
in spectrum auctions or from third parties, due to: our broadband
initiatives, including connecting more homes and businesses directly to
fibre; our ongoing deployment of newer wireless technologies such as 5G;
utilizing newly acquired spectrum; investments in network resiliency and
reliability; subscriber demand for data; evolving systems and business
processes; implementing efficiency initiatives; supporting large complex
deals; and future wireless spectrum auctions held by Innovation, Science
and Economic Development Canada (ISED). Our capital expenditure levels
could be impacted if we do not achieve our targeted operational and
financial results.
-- Regulatory decisions and developments including: potential of government
intervention to further increase wireless competition; the Canadian
Radio-television and Telecommunications Commission (CRTC) review of the
Wireless Code; the CRTC wireless wholesale services review, in which it
was determined that the CRTC will regulate wholesale GSM-based domestic
roaming rates and the setting of such rates; future spectrum auctions
(including limitations on established wireless providers, spectrum set-
aside that favours certain carriers and other advantages provided to new
and foreign participants, and the amount and cost of spectrum acquired);
restrictions on the purchase, sale and transfer of spectrum licences;
the undetermined long-term impact of the CRTC's wireline wholesale
services review; the potential impacts from the CRTC's decision to
require pro-rated refunds when customers terminate their services; the
CRTC's examination of differential pricing practices related to Internet
data plans; possible changes to the scope and nature of basic service
obligations, including possible regulation on the quality, availability
and affordability of residential Internet service and increased subsidy
requirements for these services; the impact from the review of Canada's
cultural policies by the Minister of Canadian Heritage; vertical
integration in the broadcasting industry resulting in competitors owning
broadcast content services and timely and effective enforcement of
related regulatory safeguards; and ongoing monitoring and compliance
with restrictions on non-Canadian ownership of TELUS Common Shares.
-- Ability to sustain our dividend growth program through 2019 and ability
to sustain and complete our multi-year share purchase program through
2019. These programs may be affected by factors such as the competitive
environment, economic performance in Canada, our earnings and free cash
flow, our levels of capital expenditures and spectrum licence purchases,
and regulatory decisions and developments. Quarterly dividend decisions
are subject to assessment and determination by our Board of Directors
(Board) based on the Company's financial position and outlook. The share
purchase program may be affected by a change in our intention to
purchase shares, and the assessment and determination of our Board from
time to time, based on the Company's financial position and outlook, and
the market price of TELUS shares. Consequently, there can be no
assurance that these programs will be maintained through 2019.
-- Financing and debt requirements including our ability to carry out
financing activities and our ability to maintain investment grade credit
ratings in the range of BBB+ or the equivalent.
-- Process risks including: our reliance on legacy systems and ability to
implement and support new products and services and business operations;
our ability to implement effective change management for system
replacements and upgrades, process redesigns and business integrations;
implementation of complex large enterprise deals that may be adversely
impacted by available resources, system limitations and degree of co-
operation from other service providers; our ability to successfully
manage operations in foreign jurisdictions; information security and
privacy breaches, including data loss or theft of data; intentional
threats to our infrastructure and business operations; and real estate
joint venture re-development risks.
-- Litigation and legal matters including: our ability to defend
successfully against investigations, regulatory proceedings, claims and
lawsuits, including intellectual property infringement claims and class
actions pending against us, as well as possible proceedings,
intellectual property infringement claims and class actions based on
consumer claims, data, privacy or security breaches and secondary market
liability; and the complexity of legal compliance in domestic and
foreign jurisdictions.
-- Human resource matters including: recruitment, retention and appropriate
training in a highly competitive industry; the results of the
ratification vote currently under way (result expected prior to November
20, 2016) for the renewal agreement between TELUS and the
Telecommunications Workers Union, United Steel Workers Local Union 1944
(TWU); expected negotiations for the expiry of two smaller agreements
with the Syndicat des agents de maitrise de TELUS (SAMT) expiring in
March 2017 and with the Syndicat quebecois des employes de TELUS (SQET)
expiring in December 2017; and the level of employee engagement.
-- Taxation matters including: complex tax laws that may be subject to
interpretation by the tax authorities that may differ from our
interpretations; changes in tax laws, including tax rates; elimination
of income tax deferrals through the use of different tax year-ends for
operating partnerships and corporate partners; and international tax
complexity and compliance.
-- Business continuity events including: our ability to maintain customer
service and operate our networks in the event of human error or human-
caused threats, such as cyber attacks and equipment failures that could
cause various degrees of network outages; supply chain disruptions;
natural disaster threats; epidemics; pandemics; and the completeness and
effectiveness of business continuity and disaster recovery plans and
responses.
-- Partnerships, acquisitions or divestitures including: our ability to
conclude the transaction with BCE to acquire a portion of MTS' wireless
customers and dealers, including obtaining the necessary regulatory
approvals, and to successfully migrate the customers and dealers, and
more generally, our ability to successfully integrate acquisitions,
complete divestitures or establish partnerships in a timely manner, and
realize expected strategic benefits.
-- Health, safety and environmental developments and other risk factors
discussed herein and listed from time to time in our reports and public
disclosure documents, including our annual report, annual information
form, and other filings with securities commissions or similar
regulatory authorities in Canada (on SEDAR at sedar.com) and in our
filings with the Securities and Exchange Commission (SEC) in the United
States, including Form 40-F (on EDGAR at sec.gov). Section 10 Risks and
risk management in our 2015 annual MD&A, our 2016 Q1 MD&A, our 2016 Q2
MD&A and this MD&A are incorporated by reference in this cautionary
statement.
Management's discussion and analysis
November 4, 2016
Contents
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Section Description
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1. Introduction 1.1 Preparation of the MD&A
1.2 The environment in which we operate
1.3 Consolidated highlights
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2. Core business and strategy
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3. Corporate priorities for 2016
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4. Capabilities 4.1 Principal markets addressed and
competition
4.2 Operational resources
4.3 Liquidity and capital resources
4.4 Changes in internal control over
financial reporting
----------------------------------------------------------------------------
5. Discussion of operations 5.1 General
5.2 Summary of consolidated quarterly
results and trends
5.3 Consolidated operations
5.4 Wireless segment
5.5 Wireline segment
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6. Changes in financial position
----------------------------------------------------------------------------
7. Liquidity and capital resources 7.1 Overview
7.2 Cash provided by operating
activities
7.3 Cash used by investing activities
7.4 Cash provided (used) by financing
activities
7.5 Liquidity and capital resource
measures
7.6 Credit facilities
7.7 Sale of trade receivables
7.8 Credit ratings
7.9 Financial instruments, commitments
and contingent liabilities
7.10 Outstanding share information
7.11 Transactions between related
parties
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8. Accounting matters 8.1 Critical accounting estimates
8.2 Accounting policy developments
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9. Update to assumptions
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10. Risks and risk management 10.1 Regulatory matters
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11. Definitions and reconciliations 11.1 Non-GAAP and other financial
measures
11.2 Operating indicators
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1. Introduction
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this Management's discussion and analysis (MD&A).
1.1 Preparation of the MD&A
The following sections are a discussion of the consolidated financial position and financial performance of TELUS for the three-month and nine-month periods ended September 30, 2016, and should be read together with TELUS' September 30, 2016, unaudited condensed interim consolidated financial statements (subsequently referred to as the interim consolidated financial statements). The generally accepted accounting principles (GAAP) we use are the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our interim consolidated financial statements comply with IFRS-IASB and Canadian GAAP and have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Our use of the term IFRS in this MD&A is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures, such as earnings before interest, income taxes, depreciation and amortization (EBITDA), to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 11.1. All amounts are in Canadian dollars, unless otherwise specified.
Our disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. This MD&A and the interim consolidated financial statements were reviewed by TELUS' Audit Committee and authorized by the Board of Directors for issuance on November 4, 2016.
In this MD&A, unless otherwise indicated, results for the third quarter and nine-month periods of 2016 are compared with results from the third quarter and nine-month periods of 2015.
1.2 The environment in which we operate
Economic growth
We have updated our assumptions since our 2016 Q2 MD&A. We now estimate that economic growth in Canada will be slightly slower at approximately 1.2% in 2016 (previously 1.3%) and in the range of 1.8 to 2.2% in 2017, based on a composite of estimates from Canadian banks and other sources. For our incumbent local exchange carrier (ILEC) provinces in Western Canada, we now estimate that economic growth in British Columbia will be approximately 2.8% in 2016 (previously 2.9%) and within a slightly wider range of 2.2% to 2.8% in 2017, and that economic contraction in Alberta will now be approximately (2.2)% in 2016 (previously (2.0)%) in part due to the Fort McMurray wildfires and lower oil prices in 2016. We expect growth in Alberta to be within a wider range of 1.4 to 2.3% in 2017. The Bank of Canada's October 2016 Monetary Policy Report estimated economic growth for Canada will be 1.1% in 2016 and 2% in 2017. In respect of the national unemployment rate, Statistics Canada's Labour Force Survey reported a rate of 7.0% for September 2016 (7.1% reported for both December 2015 and September 2015).
1.3 Consolidated highlights
Collective bargaining and transformative change for 2017 to 2019 compensation
In 2015, we commenced collective bargaining with the Telecommunications Workers Union, United Steel Workers Local Union 1944 (TWU), to renew a collective agreement that expired on December 31, 2015; the expired contract covered approximately 40% of our Canadian workforce as at September 30, 2016. Throughout the third quarter, negotiations between TELUS and the TWU continued. On October 3, 2016, the TWU and TELUS announced that the two parties had reached a tentative agreement, a five-year deal that would be submitted to the TWU members for ratification. The ratification vote process is to be completed no later than November 20, 2016.
Subsequent to September 30, 2016, we made commitments to pay, lump-sum amounts totaling approximately $300 million (inclusive of amounts proposed in an unratified tentative agreement), in respect of immediately-vesting, transformative compensation expense to the majority of our existing unionized and non-unionized Canadian-sited workforces; a portion of the net-of-tax amount for certain lump-sum recipients will be paid in Common Shares purchased in the market. If the tentative agreement is ratified, there will be a one-time payment to these unionized members in the fourth quarter of 2016. This payment represents increases that would have been otherwise awarded July 1, 2016, 2017 and 2018, (a period of 30 months) and compensation in consideration of collective agreement concessions that underpin future productivity improvements. A similar approach with respect to salary increases has been adopted for management employees. For most of our current Canadian-sited management employees, there will be a one-time payment in the fourth quarter of 2016 in lieu of general salary increases for 2017 and 2018 (a period of 24 months). The next salary increases will be awarded in 2019.
Long-term debt issue
In September 2016, we successfully completed a public issue of U.S.$600 million of senior unsecured notes at 2.80%, due February 16, 2027. As of the date of this MD&A, the proceeds were used to repay U.S.$453 million of commercial paper, with the balance to be used for general corporate purposes. We have fully hedged the principal and interest obligations of the notes against fluctuations in the Canadian dollar foreign exchange rate for the entire term of the notes. We have entered into a foreign exchange derivative (a cross currency interest rate exchange agreement) that effectively converted the principal payments and interest obligations to Canadian dollar obligations with an effective fixed interest rate of 2.95% and an effective issued and outstanding amount of $792 million (reflecting a fixed exchange rate of $1.3205). Our average term to maturity of long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda.) Inc. (TI) credit facility) has increased to approximately 10.7 years at September 30, 2016, from approximately 10.6 years at September 30, 2015. Additionally, our weighted average cost of long-term debt (excluding commercial paper and the revolving component of the TI credit facility) decreased to 4.23% at September 30, 2016, as compared to 4.32% at June 30, 2016 and 4.42% at September 30, 2015.
Normal course issuer bid (NCIB)
Our 2016 NCIB began on September 15, 2015 and concluded on September 14, 2016. Under the 2016 NCIB, we purchased and cancelled 9,691,400 of our Common Shares for approximately $379 million, reflecting an average share purchase price of $39.14.
In September 2016, we received approval from the Toronto Stock Exchange (TSX) for a new 2017 NCIB to purchase and cancel up to 8 million TELUS Common Shares for consideration of up to a maximum of $250 million over a 12-month period, commencing September 30, 2016. In lieu of purchasing and cancelling shares, subject to regulatory approval, an Employee Benefit Plan Trust may purchase up to 25% of the approved normal course issuer bid amount for the benefit of non-executive employees pursuant to partial payment of the immediately-vesting, transformative compensation expense.
Share purchases under the 2017 NCIB represent up to an additional 1.4% of outstanding TELUS Common Shares as of September 16, 2016. See Section 4.3 for additional details. There can be no assurance that we will complete our 2017 NCIB, as the decisions to purchase shares depend on the assessment and determination of our Board from time to time on the basis of the Company's financial position and outlook, and the market price of TELUS shares. (See Caution regarding forward-looking statements - Ability to sustain and complete multi-year share purchase program through 2019.)
Consolidated
highlights
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ ----------------------------
($ millions, unless
otherwise noted) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Consolidated
statements of
income
----------------------------------------------------------------------------
Operating revenues 3,238 3,155 2.6% 9,494 9,285 2.3%
Operating income 616 597 3.1% 1,946 1,893 2.8%
Income before income
taxes 487 491 (0.8)% 1,560 1,560 -%
Net income 355 365 (2.7)% 1,149 1,121 2.6%
Net income
attributable to
Common Shares 348 365 (4.7)% 1,142 1,121 1.9%
Net income per
Common Share ($):
Basic earnings per
share (basic EPS) 0.59 0.61 (3.3)% 1.93 1.85 4.3%
Adjusted basic
EPS(1) 0.65 0.66 (1.5)% 2.05 2.03 1.0%
Diluted 0.59 0.61 (3.3)% 1.93 1.85 4.3%
Dividends declared
per Common Share
($) 0.46 0.42 9.5% 1.36 1.24 9.7%
Basic weighted-
average Common
Shares outstanding
(millions) 592 601 (1.6)% 593 605 (2.0)%
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Consolidated
statements of cash
flows
----------------------------------------------------------------------------
Cash provided by
operating
activities 1,032 1,025 0.7% 2,487 2,686 (7.4)%
Cash used by
investing
activities (680) (549) (23.9)% (2,075) (3,852) 46.1%
Capital
expenditures
(excluding
spectrum
licences)(2) (787) (623) (26.3)% (2,174) (1,922) (13.1)%
Payments for
wireless spectrum
licences - (12) 100.0% (145) (2,002) 92.8%
Cash provided (used)
by financing
activities (370) (412) 10.2% (225) 1,247 n/m
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Other highlights
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Subscriber
connections(3)
(thousands) 12,577 12,436 1.1%
EBITDA(1) 1,131 1,068 5.8% 3,460 3,284 5.3%
EBITDA - excluding
restructuring and
other costs(1) 1,191 1,119 6.4% 3,591 3,411 5.3%
Adjusted EBITDA(1,4) 1,181 1,119 5.5% 3,557 3,411 4.3%
Adjusted EBITDA
margin(5) 36.5 35.5 1.0pts. 37.5 36.7 0.8pts.
Free cash flow(1) 98 310 (68.4)% 332 881 (62.3)%
Net debt to EBITDA -
excluding
restructuring and
other costs(1)
(times) 2.62 2.64 (0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notations used in MD&A: n/m - Not meaningful; pts. - Percentage points.
1. Non-GAAP and other financial measures. (See Section 11.1.)
2. Capital expenditures (excluding spectrum licences) include assets
purchased, but not yet paid for, and consequently differ from Cash
payments for capital assets, excluding spectrum licences, as reported on
the condensed interim consolidated statements of cash flows.
3. The sum of active wireless subscribers, residential network access lines
(NALs), high-speed Internet access subscribers and TELUS TV subscribers
(Optik TV" and TELUS Satellite TV� subscribers), measured at the end
of the respective periods based on information in billing and other
systems. On January 1, 2015, our opening reported subscriber balance has
been retrospectively adjusted to exclude 1,613,000 business NALs due to
its diminishing relevance as a key performance indicator. In addition,
subsequent to a review of our subscriber base during the first quarter of
2016, our 2016 opening postpaid wireless subscriber base was reduced by
45,000 and our 2016 opening high-speed Internet subscriber base was
increased by 21,000.
4. Adjusted EBITDA for all periods excludes restructuring and other costs
(see Section 11.1 for restructuring and other cost amounts). Adjusted
EBITDA for the third quarter of 2016 excludes net gains and equity income
of $10 million, related to real estate joint venture developments.
Adjusted EBITDA for the first nine months of 2016 excludes: (i) a $15
million gain in the second quarter of 2016, from the exchange of wireless
spectrum licences; and (ii) net gains and equity income of $19 million
($9 million in the second quarter and $10 million in the third quarter),
related to real estate joint venture developments.
5. Adjusted EBITDA margin is adjusted EBITDA divided by Operating revenues,
where the calculation of the Operating revenues excludes the net gains
and equity income related to real estate joint venture developments, as
well as the gain from exchange of wireless spectrum licences.
----------------------------------------------------------------------------
Operating highlights
-- Consolidated operating revenues increased by $83 million in the third
quarter of 2016 and $209 million in the first nine months of 2016.
Service revenues increased by $111 million in the third quarter of 2016
and $274 million in the first nine months of 2016, mainly due to growth
in wireline data revenue and wireless network revenue, partly offset by
the ongoing decline in legacy wireline voice revenue from technological
substitution and continued competitive pressures. (See Section 5.4
Wireless segment and Section 5.5 Wireline segment.)
Equipment revenues decreased by $27 million in the third quarter of 2016
and $81 million in the first nine months of 2016 resulting from a
combination of higher wireless per-unit subsidies, lower retention
volumes, and lower wireline equipment sales activity in the business
market, in part due to the economic slowdown. (See Section 5.4 Wireless
segment and Section 5.5 Wireline segment.)
Other operating income decreased slightly in the third quarter of 2016
and increased by $16 million in the first nine months of 2016. The year-
to-date increase includes a gain in the second quarter of 2016 on
exchange of wireless spectrum licences, and net gains and equity income
in 2016 related to real estate joint venture developments, partly offset
by certain business acquisition-related provisions and a decrease in
amounts recognized from the regulatory price cap deferral account. (See
Section 5.4 Wireless segment and Section 5.5 Wireline segment.)
-- During the 12-month period ended September 30, 2016, our total
subscriber connections increased by 141,000. This reflects a 12-month
increase in wireless postpaid subscribers of 2.4%, TELUS TV subscribers
of 6.4% and high-speed Internet subscribers of 5.6%, partly offset by a
7.7% decline in wireless prepaid subscribers and a 6.4% decline in
residential NALs.
Our postpaid wireless subscriber net additions were 87,000 in the third
quarter of 2016 and 156,000 in the first nine months of 2016,
representing an increase of 18,000 in the quarter and a decrease of
26,000 in the nine-month period. The increase for the third quarter
reflects higher gross additions due to the success of targeted
promotions and a lower postpaid churn rate. The decrease for the nine-
month period reflects flat gross additions due to the economic slowdown,
particularly in Alberta, increased competitive intensity and the effect
of higher handset prices (including the effect of higher supplier costs
due to the decline in the Canadian dollar exchange rate vs. the U.S.
dollar over the last two years) on customer demand, as well as an
increase in our postpaid subscriber churn rate. Our monthly postpaid
subscriber churn rate was 0.94% in the third quarter of 2016 and 0.93%
in the first nine months of 2016, as compared to 0.97% in the third
quarter of 2015 and 0.91% in the first nine months of 2015. (See Section
5.4 Wireless segment for additional details.)
Net additions of high-speed Internet subscribers were 14,000 in the
third quarter of 2016 and 44,000 in the first nine months of 2016, down
10,000 in the quarter and 25,000 in the nine-month period. The decreases
resulted from the effects of heightened competitive intensity and the
impact of the economic slowdown, resulting in lower gross additions and
increased churn, partly offset by the continued expansion of our high-
speed broadband footprint, including fibre to the premises (FTTP), as
well as the pull-through impact from the continued adoption of Optik TV.
Net additions of TELUS TV subscribers were 14,000 in the third quarter
of 2016 and 38,000 in the first nine months of 2016, down 12,000 in the
quarter and 26,000 in the nine-month period. The decreases reflect lower
gross additions, a higher customer churn rate and a decline in
satellite-TV subscribers, as the effects of heightened competitive
intensity including OTT services, slower market growth for TV services,
the economic slowdown, and a high rate of market penetration for TV
services. These pressures were partly offset by the ongoing expansion of
our addressable Optik TV footprint and increasing broadband speeds that
increase the attractiveness of our bundled offering. (See Section 5.5
Wireline segment for additional details.)
-- Operating income increased by $19 million in the third quarter of 2016
and $53 million in the first nine months of 2016, reflecting growth in
EBITDA, partly offset by increases in total depreciation and
amortization expenses resulting from the impact of our continuing
program of asset life studies and increased expenditures associated with
capital assets.
EBITDA includes restructuring and other costs, as well as net gains and
equity income related to real estate joint venture developments recorded
in the second and third quarters of 2016, and a gain from the exchange
of wireless spectrum licences recorded in the second quarter of 2016.
EBITDA increased by $63 million in the third quarter of 2016 and $176
million in the first nine months of 2016, reflecting the growth in
wireline data revenues and wireless network revenues; improvements in
Internet, business process outsourcing, TELUS TV and TELUS Health
margins; growth in other operating income noted above; and the execution
of our operational efficiency and effectiveness initiatives. This growth
was partly offset by higher wireless acquisition and retention costs,
increased restructuring costs, continued declines in legacy wireline
voice revenues, certain business acquisition-related provisions, and for
the nine-month period, approximately $5 million of costs and revenue
impacts, predominately in the wireline segment, related to the severe
wildfires in northern Alberta.
Adjusted EBITDA, which excludes restructuring and other costs, and real
estate net gains and equity income noted above, increased by $62 million
in the third quarter and $146 million in the first nine months of 2016.
(See Section 5.4 Wireless segment and Section 5.5 Wireline segment for
additional details.)
-- Income before income taxes decreased by $4 million in the third quarter
of 2016 and was unchanged in the first nine months of 2016, as increased
operating income was offset by higher financing costs. The increase in
financing costs resulted from higher average long-term debt outstanding
(which arose mainly from the purchase of spectrum licences in 2015),
higher foreign exchange losses and a decrease in interest income for the
nine-month period which resulted primarily from the recognition of $20
million interest income in the second quarter of 2015 related to the
settlement of prior years' income tax-related items. These were partly
offset by a lower weighted average cost of long-term debt and, for the
nine-month period, by higher capitalized long-term debt interest costs
for spectrum licences not yet able to be deployed.
-- Income taxes increased by $6 million in the third quarter of 2016 and
decreased by $28 million in the first nine months of 2016. The increase
for the quarter primarily reflects an increase in non-deductible
expenses in 2016, as well as adjustments recognized in 2015 from the
settlements of prior years' income tax-related matters. The decrease for
the nine-month period reflects a $48 million non-cash adjustment in the
second quarter of 2015 to revalue deferred income tax liabilities as a
result of an increase to the Alberta provincial corporate income tax
rate, partly offset by a $23 million recovery in 2015 from the
settlement of prior years' income tax-related matters. (See Section 5.3
Consolidated operations.)
-- Net income attributable to Common Shares decreased by $17 million in the
third quarter of 2016 and increased by $21 million in the first nine
months of 2016. For the quarter, higher operating income was more than
offset by increased financing costs and income taxes, while for the
nine-month period, higher operating income and lower income taxes were
partly offset by increased financing costs. Excluding net gains and
equity income from the real estate joint venture developments in 2016,
restructuring and other costs, income tax-related adjustments, and, for
the nine-month period, the effects of the gain on the exchange of
wireless spectrum licences in 2016 and the asset retirement from the
closure of Black's Photography retail stores in 2015, net income
decreased by $15 million or 3.8% in the third quarter of 2016 and $18
million or 1.5% in the first nine months of 2016.
Analysis of Net income
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------- --------------------------
($) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Net income attributable
to Common Shares 348 365 (17) 1,142 1,121 21
Add back (deduct):
Gain on the exchange
of wireless spectrum
licences, after
income taxes - - - (13) - (13)
Net gains and equity
income from real
estate joint venture
developments, after
income taxes (6) - (6) (11) - (11)
Restructuring and
other costs, after
income taxes 44 38 6 96 93 3
Unfavourable
(favourable) income
tax-related
adjustments (3) (5) 2 (2) 10 (12)
Asset retirement from
planned closure of
Black's, after income
taxes - - - - 6 (6)
----------------------------------------------------------------------------
Adjusted net income 383 398 (15) 1,212 1,230 (18)
----------------------------------------------------------------------------
-- Basic earnings per share (basic EPS) decreased by $0.02 in the third
quarter of 2016 and increased by $0.08 in the first nine months of 2016.
The reduction in the number of shares outstanding, as a result of our
NCIB program, net of share option exercises, contributed positively to
basic EPS by approximately $0.01 and $0.04, respectively, in the third
quarter and first nine months of 2016. Excluding net gains and equity
income from the real estate joint venture developments in 2016,
restructuring and other costs, income tax-related adjustments, and, for
the nine-month period, the effects of the gain on the exchange of
wireless spectrum licences in 2016 and the asset retirement from the
closure of Black's Photography retail stores in 2015, basic EPS
decreased by $0.01 in the third quarter of 2016 and increased by $0.02
in the first nine months of 2016.
Analysis of basic EPS
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Basic EPS 0.59 0.61 (0.02) 1.93 1.85 0.08
Add back (deduct):
Gain on the exchange of
wireless spectrum
licences, after income
taxes, per share - - - (0.02) - (0.02)
Net gains and equity
income from real
estate joint venture
developments, after
income taxes, per
share (0.01) - (0.01) (0.02) - (0.02)
Restructuring and other
costs, after income
taxes, per share 0.08 0.06 0.02 0.16 0.15 0.01
Unfavourable
(favourable) income
tax-related
adjustments, per share (0.01) (0.01) - - 0.02 (0.02)
Asset retirement from
planned closure of
Black's, after income
taxes, per share - - - - 0.01 (0.01)
----------------------------------------------------------------------------
Adjusted basic EPS 0.65 0.66 (0.01) 2.05 2.03 0.02
----------------------------------------------------------------------------
-- Dividends declared per Common Share were $0.46 in the third quarter of
2016 and $1.36 in the first nine months of 2016, reflecting increases of
9.5% from the third quarter of 2015 and 9.7% from the first nine months
of 2015. This is consistent with our announced intention of sustained
dividend growth of circa 10% per annum through 2016. On November 3,
2016, the Board declared a fourth quarter dividend of $0.48 per share on
the issued and outstanding Common Shares, payable on January 3, 2017, to
shareholders of record at the close of business on December 9, 2016. The
fourth quarter dividend reflects a cumulative increase of $0.04 per
share or 9.1% from the $0.44 per share dividend declared one year
earlier.
Liquidity and capital resource highlights
-- Net debt to EBITDA - excluding restructuring and other costs was 2.62
times at September 30, 2016, down from 2.64 at September 30, 2015, as
the increase in net debt was offset by growth in EBITDA - excluding
restructuring and other costs. (See Section 4.3 Liquidity and capital
resources and Section 7.5 Liquidity and capital resource measures.)
-- Cash provided by operating activities increased by $7 million in the
third quarter of 2016 and decreased by $199 million in the first nine
months of 2016. The increase for the quarter resulted primarily from
higher EBITDA and working capital changes, net of increases in income
taxes paid and interest paid. The decrease for the nine-month period
resulted from increases in income taxes paid, interest paid and
restructuring disbursements, partly offset by EBITDA growth and lower
share-based compensation payments. (See Section 7.2 Cash provided by
operating activities.)
-- Cash used by investing activities increased by more than $131 million in
the third quarter of 2016 and decreased by nearly $1.8 billion in the
first nine months of 2016. The increase for the quarter mainly reflects
higher capital expenditures - excluding spectrum licences. The decrease
for the nine-month period mainly reflects cash payments for spectrum
licences of $2 billion made in 2015. Capital expenditures - excluding
spectrum licences increased by $164 million in the third quarter and
$252 million in the first nine months, mainly due to the higher
generational capital investments in wireless and wireline broadband
infrastructure, including connecting more homes and businesses directly
to our fibre-optic network and deploying wireless spectrum licences.
(See Section 7.3 Cash used by investing activities.)
-- In the third quarter of 2016, Cash used by financing activities
decreased by $42 million, mainly due to lower purchases of shares under
the NCIB program, offset by net repayments of long-term debt in the
third quarter of 2016, as compared to net issues of debt in the same
period in 2015. For the nine-month period, comparative net cash used by
financing activities increased by nearly $1.5 billion mainly due to
lower net issues of long-term debt in 2016. (See Section 7.4 Cash
provided (used) by financing activities.)
-- Free cash flow decreased by $212 million in the third quarter of 2016
and $549 million in the first nine months of 2016, resulting from
increases in income taxes paid, increases in capital expenditures -
excluding spectrum licences and increases in interest paid, partly
offset by adjusted EBITDA growth. In addition, for the nine-month
period, the decrease reflected higher restructuring disbursements,
partly offset by lower share-based compensation payments. (See Section
11.1.)
2. Core business and strategy
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this MD&A.
Our core business was described in our 2015 annual MD&A. The following are business updates grouped under the applicable strategic imperatives.
Focusing relentlessly on growth markets of data, IP and wireless
External wireless revenues and wireline data revenues totalled $8.3 billion in the first nine months of 2016, up by $340 million or 4.3%, while wireline voice and other revenues and wireline Other operating income totalled $1.2 billion in the first nine months of 2016, down $131 million or 9.8%. Wireless revenues and wireline data revenues in total represented 87% of TELUS' consolidated revenues for the first nine months of 2016, as compared to 86% in the same period in 2015.
Providing integrated solutions that differentiate TELUS from our competitors
TELUS introduced its advanced 150 Mbps Internet plan, which uniquely offers symmetrical download and upload speeds of up to 150 Mbps to consumer and business customers on the TELUS PureFibre" fibre-optic network. The symmetrical upload speed of 150 Mbps is not currently offered by cable-TV competitors. TELUS believes that symmetrical uploads are a requirement of home monitoring, IoT and consumer-based cloud services.
Building national capabilities across data, IP, voice and wireless
During 2016, in accordance with an asset transfer agreement with Bell Mobility Inc. (Bell) and consistent with our network optimization strategy, we exchanged certain wireless telecommunication tower sites. The exchange entailed the assignment of existing lease agreements for each tower site, as well as the transfer of all rights, titles and interests on the construction on the leased premises, including tower structures, antennae and cabling. The exchange benefits both parties as the location of the tower sites are well positioned for utilization within each party's respective 4G long-term evolution (LTE) network footprints. It is expected that additional transfers of assets will occur in multiple tranches throughout 2016 and subsequent periods.
Partnering, acquiring and divesting to accelerate the implementation of our strategy and focus our resources on core business
In June 2016, we submitted a notification and advance ruling request to the Competition Bureau regarding our previously announced agreement with BCE Inc., pursuant to which we intend to acquire approximately one-third of Manitoba Telecom Services Inc.'s (MTS) postpaid wireless subscribers and be assigned one-third of MTS' dealer locations in Manitoba, dependent on the successful completion of BCE Inc.'s acquisition of MTS. Our total price of the transaction with BCE Inc. will vary depending upon the actual number of qualifying postpaid wireless subscribers acquired. On June 23, 2016, Manitoba Telecom Services Inc. (MTS) announced that a significant majority of its shareholders had approved the previously announced agreement in which BCE Inc. will acquire all issued and outstanding common shares of MTS. On June 29, 2016, the Manitoba Court of Queen's Bench approved the transaction. The transaction is still subject to regulatory approvals and other customary closing conditions, and is expected to close in late 2016 or early 2017.
In September 2016, TELUS acquired the Canadian business operations of Nightingale Informatix Corp., including its proprietary electronic medical record (EMR) software and customers. The acquisition is complementary to our existing lines of business and is consistent with our corporate priority of advancing TELUS' leadership position in healthcare information management.
We partnered with Huawei Canada for trials of 5G wireless technology, which is anticipated to begin deployment by 2020. These trials were successful, having achieved wireless download speeds of 29.3 Gbps. Additionally, we upgraded several 4G LTE wireless sites with LTE-Advanced-Pro technologies and have successfully tested download speeds that are approaching 1Gbps, approximately 10 times faster speeds than those currently available through our LTE advanced networks. We believe that devices that can take advantage of these technologies may be available as early as 2017. Our advancement towards 5G technology builds on our fibre-optic investments, and advances us further towards converged and more efficient networks.
Going to market as one team under a common brand, executing a single strategy
As part of our strategy of building national capabilities, we have formed the TELUS Manitoba Community Board, which will launch in early 2017 and will provide funding to local registered charities that support youth and families and focus on at least one of three key areas: health, education and the environment.
Investing in internal capabilities to build a high-performance culture and efficient operation
Through our transformative changes for 2017 to 2019 compensation, we expect to realize savings in 2017, 2018 and over the coming years through avoidance of the compounding effect of two years of salary increases and the resulting impact on bonuses and benefits. See Collective bargaining and transformative change for 2017 to 2019 compensation in Section 1.3.
3. Corporate priorities for 2016
Our corporate priorities for 2016 were listed in our 2015 annual MD&A.
4. Capabilities
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this MD&A.
4.1 Principal markets addressed and competition
For a discussion of our principal markets and an overview of competition, please refer to Section 4.1 of our 2015 annual MD&A and updates in our 2016 Q1 MD&A and 2016 Q2 MD&A.
4.2 Operational resources
For a discussion of our operational resources, please refer to Section 4.2 of our 2015 annual MD&A and updates in our 2016 Q1 MD&A and 2016 Q2 MD&A.
Wireless segment
In the third quarter of 2016, we continued to deliver leading blended customer churn on a national basis. Our monthly postpaid churn rate was 0.94% in the third quarter of 2016, representing the 12th quarter in the past 13 quarters that our postpaid churn rate was below 1%, despite economic pressures that have resulted in customers purchasing fewer handsets. Our monthly blended churn rate of 1.18% in the third quarter of 2016 is among our lowest quarterly churn rates since we became a national carrier 16 years ago. This further exemplifies the success of our differentiated "customers first" culture, our ongoing focus on delivering an outstanding customer experience, combined with attractive new products and services, and our retention programs.
During the first nine months of 2016, we continued our deployment of 700 MHz and 2500 MHz wireless spectrum licences acquired during Innovation, Science and Economic Development Canada's (ISED) wireless spectrum auctions, which we have begun to operationalize for the benefit of our customers. Since mid-2013, we have invested more than $3.6 billion to acquire wireless spectrum licences in spectrum auctions and other transactions, which has more than doubled our national spectrum holdings, in support of our top corporate priority of putting customers first. Wireless data consumption has been increasing rapidly and we have responded by investing to extend the capacity of our network to support the additional data consumption and growth in our wireless customer base.
As at September 30, 2016, our 4G LTE network covered 97% of Canada's population, up from 95% at September 30, 2015. Furthermore, we continue to invest in our LTE advanced network roll-out, which covered more than 61% of Canada's population at September 30, 2016. Outside of LTE advanced and LTE coverage areas, and for voice services, the LTE devices we offer also operate on our HSPA+ network, which covered 99% of Canada's population at September 30, 2016.
Wireline segment
We continue to invest in urban and rural communities with commitments to deliver broadband network capabilities to as many Canadians as possible. We are expanding our fibre footprint by connecting more homes and businesses directly to fibre. Throughout 2015 and 2016, we have made announcements regarding investments to bring our fibre-optic network to cities across B.C., Alberta and Eastern Quebec. We have also increased broadband Internet speeds, expanded our IP TV video-on-demand library and high-definition content, including the launch of 4K TV, and enhanced marketing of data products and bundles.
As at September 30, 2016, our high-speed broadband coverage reached more than 2.9 million households and businesses in B.C., Alberta and Eastern Quebec, including approximately 0.95 million homes and businesses covered by fibre-optic cable, up from 0.83 million homes and businesses in the second quarter of 2016, which now provides these premises with immediate access to our gigabit-capable fibre-optic network.
4.3 Liquidity and capital resources
Capital structure financial policies
Our objective when managing capital is to maintain a flexible capital structure that optimizes the cost and availability of capital at acceptable risk.
In the management of capital and in its definition, we include Common Share equity (excluding Accumulated other comprehensive income), Long-term debt (including long-term credit facilities, commercial paper backstopped by long-term credit facilities and any associated hedging assets or liabilities, net of amounts recognized in Accumulated other comprehensive income), Cash and temporary investments, and securitized trade receivables.
We manage our capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of our telecommunications infrastructure. To maintain or adjust our capital structure, we may adjust the amount of dividends paid to holders of Common Shares, purchase shares for cancellation pursuant to our normal course issuer bids (NCIBs), issue new shares, issue new debt, issue new debt to replace existing debt with different characteristics and/or increase or decrease the amount of trade receivables sold to an arm's-length securitization trust.
We monitor capital by utilizing a number of measures, including the net debt to EBITDA - excluding restructuring and other costs ratio and the dividend payout ratios. (See definitions in Section 11.1.)
Financing and capital structure management plans
Report on financing and capital structure management plans
---------------------------------------------------------------------------- Pay dividends to the holders of Common Shares under our multi-year dividend growth program - In May 2016, we announced an intention to target ongoing semi-annual dividend increases, with the annual increase in the range of 7 to 10% from 2017 through to the end of 2019, thereby extending the policy first announced in May 2011. Notwithstanding this target, dividend decisions will continue to be subject to our Board's assessment and the determination of our financial position and outlook on a quarterly basis. Our long-term dividend payout ratio guideline is 65 to 75% of prospective net earnings per share. There can be no assurance that we will maintain a dividend growth program through 2019. (See Caution regarding forward-looking statements - Ability to sustain our dividend growth program per annum through 2019.) - On November 3, 2016, a fourth quarter dividend of $0.48 per share was declared on our issued and outstanding Common Shares, payable on January 3, 2017, to shareholders of record at the close of business on December 9, 2016. The fourth quarter dividend for 2016 reflects a cumulative increase of $0.04 per share or 9.1% from the $0.44 per share dividend paid in January 2016. ---------------------------------------------------------------------------- Purchase Common Shares under our multi-year NCIB - On May 5, 2016, we announced our intention to renew our NCIB program in each of the next three years in order to permit purchases for up to $250 million in each calendar year. In September 2016, we received approval from the Toronto Stock Exchange (TSX) for a new 2017 NCIB to purchase and cancel up to 8 million TELUS Common Shares for consideration of up to $250 million over a 12-month period, commencing September 30, 2016. In lieu of purchasing and cancelling shares, subject to regulatory approval, an Employee Benefit Plan Trust may purchase up to 25% of the approved normal course issuer bid amount for the benefit of non-executive employees pursuant to partial payment of the immediately-vesting, transformative compensation expense. - Share purchases under the 2017 NCIB represent up to 1.4% of outstanding TELUS Common Shares as of September 16, 2016. Such purchases may be made through the facilities of the TSX, the New York Stock Exchange (NYSE) and alternative trading platforms as may be permitted by applicable securities laws and regulations. Shares will be purchased only when and if we consider it advisable. There can be no assurance that we will complete our 2017 NCIB or that we will renew and complete our NCIB program in each of the next two years, as the decisions to purchase shares depend on the assessment and determination of our Board from time to time on the basis of the Company's financial position and outlook, and the market price of TELUS shares. (See Caution regarding forward-looking statements - Ability to sustain and complete multi-year share purchase program through 2019.) - Under the 2016 NCIB, which came into effect on September 15, 2015 and concluded on September 14, 2016, we purchased and cancelled 9,691,400 of our Common Shares for approximately $379 million, reflecting an average share purchase price was $39.14. The purchased and cancelled shares represent 1.6% of the shares outstanding prior to commencement of the 2016 NCIB. - We have also entered into an automatic share purchase plan (ASPP) with a broker for the purpose of permitting us to purchase our Common Shares under our NCIB program at times when we would not be permitted to trade in our shares, including regularly scheduled quarterly blackout periods. Such purchases will be determined by the broker in its sole discretion based on parameters that we established prior to any blackout period, in accordance with TSX rules and applicable securities laws. The ASPP has been approved by the TSX, and may be implemented from time to time in the future. ---------------------------------------------------------------------------- Use proceeds from securitized trade receivables (Short-term borrowings), bank facilities, commercial paper and cash retained through dividend reinvestment, as needed, to supplement free cash flow and meet other cash requirements - Our issued and outstanding commercial paper was $137 million at September 30, 2016, all of which was denominated in U.S. dollars (U.S.$104 million), compared to $256 million (U.S.$185 million) at December 31, 2015 and $787 million (U.S.$589 million) at September 30, 2015. - Proceeds from securitized trade receivables were $100 million at September 30, 2016, September 30, 2015 and December 31, 2015. ---------------------------------------------------------------------------- Maintain compliance with financial objectives - Maintain investment grade credit ratings in the range of BBB+ or the equivalent - On November 4, 2016, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. (See Section 7.8 Credit ratings.) - Net debt to EBITDA - excluding restructuring and other costs ratio of 2.00 to 2.50 times - As measured at September 30, 2016, the ratio was 2.62 times, outside of the range primarily due to the funding of spectrum licences acquired in ISED's wireless spectrum auctions during 2014 and 2015. We will endeavour to return the ratio to within this objective range in the medium term, as we believe that this range is supportive of our long-term strategy. (See Section 7.5 Liquidity and capital resource measures.) - Dividend payout ratio of 65 to 75% of net earnings per share on a prospective basis - The disclosed dividend payout ratio is a historical measure utilizing the last four quarters of dividends declared and earnings per share, and is presented for illustrative purposes in evaluating our target guideline. We estimate that we are within our target guideline on a prospective dividend payout ratio basis. As at September 30, 2016, the historical ratio of 76% exceeded the desired range. (See Section 7.5 Liquidity and capital resource measures.) - Generally maintain a minimum $1 billion in unutilized liquidity - As at September 30, 2016, our unutilized liquidity was greater than $1 billion. (See Section 7.6 Credit facilities.) ----------------------------------------------------------------------------
4.4 Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
5. Discussion of operations
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this MD&A.
5.1 General
Our operating segments and reportable segments are currently wireless and wireline. Segmented information in Note 5 of the interim consolidated financial statements is regularly reported to our Chief Executive Officer (CEO) (the chief operating decision-maker).
5.2 Summary of consolidated quarterly results and trends
Summary of quarterly results
---------------------------------------------------------------------------- ($ millions, except per share amounts) 2016 Q3 2016 Q2 2016 Q1 2015 Q4 ---------------------------------------------------------------------------- Operating revenues 3,238 3,148 3,108 3,217 ---------------------------------------------------------------------------- Operating expenses Goods and services purchased(1) 1,426 1,331 1,300 1,482 Employee benefits expense(1) 681 628 668 757 Depreciation and amortization 515 499 500 518 ---------------------------------------------------------------------------- Total operating expenses 2,622 2,458 2,468 2,757 ---------------------------------------------------------------------------- Operating income 616 690 640 460 Financing costs 129 134 123 114 ---------------------------------------------------------------------------- Income before income taxes 487 556 517 346 Income taxes 132 140 139 85 ---------------------------------------------------------------------------- Net income 355 416 378 261 ---------------------------------------------------------------------------- Net income attributable to Common Shares 348 416 378 261 ---------------------------------------------------------------------------- Net income per Common Share: Basic earnings per share (Basic EPS) 0.59 0.70 0.64 0.44 Adjusted basic EPS(2) 0.65 0.70 0.70 0.54 Diluted 0.59 0.70 0.64 0.44 Dividends declared per Common Share 0.46 0.46 0.44 0.44 ---------------------------------------------------------------------------- Additional information: EBITDA(2) 1,131 1,189 1,140 978 Restructuring and other costs(2) 60 23 48 99 EBITDA - excluding restructuring and other costs(2) 1,191 1,212 1,188 1,077 Cash provided by operating activities 1,032 892 563 863 Free cash flow(2) 98 126 108 197 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ($ millions, except per share amounts) 2015 Q3 2015 Q2 2015 Q1 2014 Q4 ---------------------------------------------------------------------------- Operating revenues 3,155 3,102 3,028 3,128 ---------------------------------------------------------------------------- Operating expenses Goods and services purchased(1) 1,394 1,372 1,284 1,476 Employee benefits expense(1) 693 649 609 651 Depreciation and amortization 471 464 456 468 ---------------------------------------------------------------------------- Total operating expenses 2,558 2,485 2,349 2,595 ---------------------------------------------------------------------------- Operating income 597 617 679 533 Financing costs 106 110 117 115 ---------------------------------------------------------------------------- Income before income taxes 491 507 562 418 Income taxes 126 166 147 106 ---------------------------------------------------------------------------- Net income 365 341 415 312 ---------------------------------------------------------------------------- Net income attributable to Common Shares 365 341 415 312 ---------------------------------------------------------------------------- Net income per Common Share: Basic earnings per share (Basic EPS) 0.61 0.56 0.68 0.51 Adjusted basic EPS(2) 0.66 0.66 0.70 0.53 Diluted 0.61 0.56 0.68 0.51 Dividends declared per Common Share 0.42 0.42 0.40 0.40 ---------------------------------------------------------------------------- Additional information: EBITDA(2) 1,068 1,081 1,135 1,001 Restructuring and other costs(2) 51 59 17 26 EBITDA - excluding restructuring and other costs(2) 1,119 1,140 1,152 1,027 Cash provided by operating activities 1,018 943 718 917 Free cash flow(2) 310 300 271 337 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1. Goods and services purchased and Employee benefits expense amounts include restructuring and other costs. 2. See Section 11.1 Non-GAAP and other financial measures. ----------------------------------------------------------------------------
Trends
The consolidated revenue trend reflects increases in: (i) wireline data revenues, driven by business process outsourcing, Internet, enhanced data services and TELUS TV services; and (ii) wireless network revenues generated from growth in both our average revenue per subscriber unit per month (ARPU) and subscriber base. This growth was partially offset by: (i) the continued declines in wireline voice revenues due to technological substitution and greater use of inclusive long distance and lower wholesale volumes; and (ii) the decline in wireless equipment revenue, reflecting lower retention volumes, partly offset by higher-value smartphones in the sales mix. Retention volumes declined due to (i) the effects on contract renewals of higher handset prices (including the effect of higher supplier costs due to the decline in the Canadian dollar exchange rate vs. the U.S. dollar over the last two years), as well as an increasing number of clients on month-to-month service; and (ii) and economic pressures resulting in customers purchasing fewer handsets.
The trend of increasing wireline data revenue reflects growth in high-speed Internet and enhanced data services reflecting a larger high-speed Internet subscriber base (up 5.6% in the 12-month period ended September 30, 2016), continued expansion of our broadband footprint, including fibre-optic cable, and increased pricing; growth in business process outsourcing; and the continuing but moderating expansion of our TELUS TV subscriber base (up 6.4% in the 12-month period ended September 30, 2016) and increased pricing. A general trend of declining wireline voice revenues is due to competition from voice over IP (VoIP) service providers (including cable-TV competitors) and resellers, as well as technological substitution to wireless and IP-based services and applications, continuing increased competition in the small and medium-sized business market, and the impact of the economic slowdown.
The high-speed Internet subscriber growth has declined during the first nine months of 2016, primarily from the impact of the economic slowdown and competitive intensity, however, we expect the subscriber growth to gradually improve as the economy recovers and as we continue our investments in expanding our fibre-optic network. The TELUS TV subscriber base growth is moderating due to the effects of slower subscriber growth for paid TV services, the economic slowdown, the high rate of market penetration and increased competition, including from over-the-top (OTT) services. Residential network access line (NAL) losses continue to reflect the economic slowdown and the ongoing trend of substitution to wireless and Internet-based services, as noted above.
The wireless subscriber base growth trend has moderated due to the impacts of the economic slowdown, particularly in Alberta, heightened intensity and the effects of higher handset prices, partly offset by our customers first initiatives and retention programs. The wireless ARPU growth trend has increased slightly in the past three quarters due to higher mix of share plans and increased mix of higher-rate plans including the newly launched premium plus plans, influenced by competitive pressures driving larger allotments of data provided in rate plans, including data sharing and international data roaming features and plans, consumer response to increased frequency of customer data usage notifications and offloading of data traffic to increasingly available Wi-Fi hotspots. ARPU is expected to continue to increase modestly over time, as a result of the continued growth in data usage and the ongoing shift in our subscriber base towards higher-value postpaid customers, as seen in the third quarter of 2016. However, the level of ARPU is highly dependent on competition, the economic environment, consumer behaviour, the regulatory environment, device selection and other factors, and, as a consequence, there cannot be any assurance that ARPU growth will continue to materialize.
Retention spending as a percentage of network revenue has increased from 12.8% in the first nine months of 2015 to 13.7% in the first nine months of 2016, mainly from an increase in the sales mix of higher-subsidy smartphones. In addition, due to the coterminous expiration of two-year and three-year contracts beginning on June 3, 2015, there are a greater number of customers renewing contracts at any given time, which has impacted acquisition and retention trends. We have generally experienced a higher volume of contract renewals than previously experienced prior to 2015. We expect this trend to continue. We also expect to experience continuing pressure on our postpaid subscriber churn if competitive intensity continues, in part due to an increase in customers on expired contracts, as well as customers bringing their own devices and therefore not entering into term contracts. Accordingly, our wireless segment historical operating results and trends prior to the coterminous expiration of two-year and three-year contracts may not be reflective of results and trends for future periods.
Historically, there has been significant third and fourth quarter seasonal effects reflected in higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals in those quarters. These impacts can be more pronounced around popular device launches and seasonal events such as back to school, Black Friday and Christmas. The costs associated with higher seasonal loading volumes have typically resulted in sequential decreases in wireless EBITDA from the second quarter through to the fourth quarter, typically followed by sequential increases in wireless EBITDA from the fourth quarter through to the second quarter. Subscriber additions have generally been lowest in the first quarter. Historically, wireless ARPU has experienced seasonal sequential increases in the second and third quarters, reflecting higher levels of usage and roaming in the spring and summer, followed by seasonal sequential declines in the fourth and first quarters. This seasonal effect on ARPU is expected to diminish in the future, as unlimited nationwide voice plans become more prevalent and chargeable voice and data usage and long distance spikes become less pronounced.
The trend in Goods and services purchased expense generally reflects increasing wireless equipment expenses associated with higher-value smartphones in the sales mix and increased handset costs (as described above); increasing wireless customer service, administrative, external labour and distribution channel expenses to support moderating growth in our subscriber base; increased wireline TV costs of sales; and higher non-labour restructuring and other costs in 2015 mainly from real estate rationalization. These were partly offset by lower transit and termination costs and wireline equipment costs.
The trend in Employee benefits expense reflects moderating wages and salaries, as growth in the number of TELUS International employees to support increased business process outsourcing revenue growth, inflationary compensation increases and higher labour restructuring costs from efficiency initiatives were offset by lower defined benefit pension plan and share-based compensation expenses, and a decrease in the number of full-time equivalent (FTE) domestic employees. We expect to record significant transformative compensation expenses in the fourth quarter of 2016. See Collective bargaining and transformative change for 2017 to 2019 compensation in Section 1.3 Consolidated highlights.
The general trend in Depreciation and amortization reflects increases due to the impact of our continuing program of asset life studies, as well as growth in capital assets supporting the expansion of our broadband footprint and enhanced long-term evolution (LTE) network coverage. The investments in our fibre-optic network also support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G.
The general trend in Financing costs reflects an increase in long-term debt outstanding, mainly associated with significant investments in wireless spectrum licences acquired during wireless spectrum licence auctions in 2014 and 2015 and our generational investments in fibre to the home. Financing costs also include the Employee defined benefit plans net interest expense that has decreased for 2016, primarily due to the decrease in the defined benefit plan deficit at December 31, 2015, as compared to one year earlier, partly offset by an increase in the discount rate. Moreover, Financing costs are net of capitalized interest related to spectrum licences acquired during the wireless spectrum licence auctions, which we expect to deploy into our existing network in future periods (capitalized long-term debt interest was $40 million in the first nine months of 2016, as compared to $27 million in the first nine months of 2015 and $45 million during fiscal year 2015). Capitalization of long-term debt interest will moderate, as cell sites become ready to utilize the spectrum frequencies. Financing costs for the eight periods shown included varying amounts of foreign exchange gains or losses and varying amounts of interest income, including $20 million of interest income in the second quarter of 2015 resulting from the settlement of prior years' income tax-related matters.
The trend in Net income reflects the items noted above, as well as non-cash adjustments arising from legislated income tax changes and adjustments recognized in the current period for income tax of prior periods, including any related after-tax interest on reassessments. The trend in basic EPS is impacted by the share purchases under our normal course issuer bid (NCIB) program.
The trend in Cash provided by operating activities reflects generally higher income tax payments and increased interest payments and higher restructuring and other disbursements, partly offset by growth in consolidated EBITDA. The trend in free cash flow reflects the factors affecting Cash provided by operating activities, as well as increases in capital expenditures (excluding spectrum licences).
5.3 Consolidated operations
The following is a discussion of our consolidated financial performance. Segmented information in Note 5 of the interim consolidated financial statements is regularly reported to our CEO (the chief operating decision-maker). We discuss the performance of our segments in Section 5.4 Wireless segment, Section 5.5 Wireline segment and in capital expenditures in Section 7.3 Cash used by investing activities.
Operating revenues
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Service 3,045 2,934 3.8% 8,921 8,647 3.2%
Equipment 180 207 (13.0)% 516 597 (13.6)%
----------------------------------------------------------------------------
Revenues arising from
contracts with
customers 3,225 3,141 2.7% 9,437 9,244 2.1%
Other operating income 13 14 (7.1)% 57 41 39.0%
----------------------------------------------------------------------------
3,238 3,155 2.6% 9,494 9,285 2.3%
----------------------------------------------------------------------------
-- Service revenue increased by $111 million in the third quarter of 2016
and $274 million in the first nine months of 2016. The increases
primarily reflect growth in wireline data services and wireless network
revenues, partly offset by continuing declines in wireline voice
revenues, as well as the impacts of the economic slowdown, particularly
in Alberta. Wireless network revenue reflects growth in blended ARPU and
the wireless subscriber base. Wireline data service revenue reflects
increased wireline business process outsourcing revenue, higher wireline
Internet, enhanced data and TELUS TV revenue due to subscriber growth
and higher revenue per customer, and continued, but moderating,
expansion of our subscriber base.
-- Equipment revenue decreased by $27 million in the third quarter of 2016
and $81 million in the first nine months of 2016. The decrease reflects
a decline in wireless equipment revenue of $25 million for the third
quarter and $60 million for the first nine months from a combination of
higher per-unit subsidies, lower retention volumes, and discontinuance
of Black's Photography revenue from the closure of stores in August
2015, partly offset by higher-value smartphones in the sales mix. Also
reflected is lower wireline equipment revenue of $2 million for the
third quarter and $21 million for the nine-month period, primarily from
lower sales activity in the business market in part from the economic
slowdown and a focus on providing managed services rather than
equipment-only sales.
-- Other operating income decreased slightly in the third quarter of 2016
and increased by $16 million in the first nine months of 2016. In the
third quarter and nine-month period, gains in 2016 from the sale of
property, plant and equipment and net gains and equity income in 2016
related to real estate joint venture developments were offset by certain
business acquisition-related provisions and a decrease in amounts
recognized from the regulatory price cap deferral account for
provisioning broadband Internet services to eligible rural and remote
communities. The year-to-date increase also reflects a gain in the
second quarter of 2016 from the exchange of wireless spectrum licences.
Operating expenses
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Goods and services
purchased 1,426 1,394 2.3% 4,057 4,050 0.2%
Employee benefits
expense 681 693 (1.7)% 1,977 1,951 1.3%
Depreciation 388 361 7.5% 1,158 1,069 8.3%
Amortization of
intangible assets 127 110 15.5% 356 322 10.6%
----------------------------------------------------------------------------
2,622 2,558 2.5% 7,548 7,392 2.1%
----------------------------------------------------------------------------
-- Goods and services purchased increased by $32 million in the third
quarter of 2016 and $7 million in the first nine months of 2016. The
increases were due to higher wireless acquisition and retention spending
(including the effect of higher supplier cost of handsets due to the
decline in the Canadian dollar exchange rate vs. the U.S. dollar over
the last two years) and higher wireline network operating and
administrative costs to support our growing subscriber base, and higher
advertising and promotional expenses in support of bundled wireline
offerings and in response to heightened competitive intensity, as well
as higher TV costs of sales, partly offset by lower wireline transit and
termination costs, ongoing operational efficiency and effectiveness
initiatives, and lower wireline equipment costs related to the decline
in equipment revenue.
-- Employee benefits expense decreased by $12 million in the third quarter
of 2016, mainly from lower wages and salaries resulting from a decrease
in employee compensation from ongoing operational efficiency and
effectiveness initiatives, a lower defined benefit pension plan expense
and lower share-based compensation. These decreases were partly offset
by an increase in wages and salaries from growth in the number of TELUS
International employees to support increased business process
outsourcing revenue and inflationary compensation increases.
For the nine-month period, employee benefits expense increased by $26
million, primarily due to higher wages and salaries, resulting from an
increase in employee compensation to support increased business process
outsourcing revenue, and higher labour-related restructuring costs from
ongoing operational efficiency and effectiveness initiatives. These
increases were partially offset by lower wages and salaries resulting
from the decrease in the number of domestic FTE employees, as noted
above, and lower defined benefit pension plan and share-based
compensation expenses.
-- Depreciation increased by $27 million in the third quarter of 2016 and
$89 million in the first nine months of 2016, due to the impact of our
continuing program of asset life studies and increased expenditures
associated with capital assets (such as the broadband network and the
wireless LTE network), partly offset by asset retirements of $9 million
in 2015 relating to the closure of Black's Photography retail stores.
-- Amortization of intangible assets increased by $17 million in the third
quarter of 2016 and $34 million in the first nine months of 2016,
reflecting increased expenditures associated with the intangible asset
base, partially offset by software asset life adjustments arising from
our continuing program of asset life studies.
Operating income
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Wireless EBITDA (See
Section 5.4) 759 715 6.2% 2,308 2,178 6.0%
Wireline EBITDA (See
Section 5.5) 372 353 5.1% 1,152 1,106 4.1%
Depreciation and
amortization (discussed
above) (515) (471) (9.3)% (1,514) (1,391) (8.8)%
----------------------------------------------------------------------------
616 597 3.1% 1,946 1,893 2.8%
----------------------------------------------------------------------------
Operating income increased by $19 million in the third quarter of 2016 and $53 million in the first nine months of 2016, as growth in EBITDA was partly offset by increased Depreciation and amortization expenses.
Financing costs
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Gross interest expenses 137 133 3.0% 412 382 7.9%
Capitalized long-term
debt interest (12) (18) 33.3% (40) (27) (48.1)%
Employee defined benefit
plans net interest 1 7 (85.7)% 3 20 (85.0)%
Interest (income) - - -% (1) (21) 95.2%
Foreign exchange losses
(gains) 3 (16) n/m 12 (21) n/m
----------------------------------------------------------------------------
129 106 21.7% 386 333 15.9%
----------------------------------------------------------------------------
-- Gross interest expenses, prior to capitalization of long-term debt
interest, increased by $4 million in the third quarter of 2016 and $30
million in the first nine months of 2016, primarily due to the increase
in average long-term debt balances outstanding, which arose mainly from
the purchase of spectrum licences, partly offset by a reduction in the
effective interest rate. Our weighted average interest rate on long-term
debt (excluding commercial paper and the revolving component of the
TELUS International (Cda.) Inc. credit facility) was 4.23% at September
30, 2016, as compared to 4.42% one year earlier. (See Long-term debt
issues and repayments in Section 7.4.)
-- Capitalized long-term debt interest is in respect of debt incurred for
the purchase of spectrum licences during spectrum auctions held by
Innovation, Science and Economic Development Canada (ISED), which we
expect to deploy in our existing network in future periods.
Capitalization of long-term debt interest will continue until
substantially all of the activities necessary to prepare the spectrum
for its intended use are complete; effectively when cell sites that can
utilize the spectrum are ready to be put into service.
-- Employee defined benefit plans net interest decreased by $6 million in
the third quarter of 2016 and $17 million in the first nine months of
2016, mainly from the decrease in the defined benefit plan deficit at
December 31, 2015, to $53 million from $598 million one year earlier,
partly offset by a higher discount rate.
-- Interest income in the first nine months of 2015 was derived primarily
from $20 million interest income related to the settlement of prior
years' income-tax related matters.
-- Foreign exchange losses (gains) fluctuate from period to period as a
result of increased application of hedge accounting.
Income taxes
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
-------------------------- -------------------------------
($ millions,
except tax
rates) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Income tax
computed at
applicable
statutory
rates 129 130 (0.8)% 414 412 0.5%
Revaluation of
deferred
income tax
liability to
reflect future
statutory
income tax
rates - - -% 1 48 (97.9)%
Adjustments
recognized in
the current
period for
income taxes
of prior
periods (3) (4) 25.0% (3) (23) 87.0%
Other 6 - n/m (1) 2 n/m
----------------------------------------------------------------------------
Income taxes 132 126 4.8% 411 439 (6.4)%
----------------------------------------------------------------------------
Income taxes
computed at
applicable
statutory
rates (%) 26.6 26.5 0.1pts. 26.5 26.4 0.1pts.
Effective tax
rate (%) 27.1 25.7 1.4pts. 26.3 28.1 (1.8)pts.
----------------------------------------------------------------------------
Total income tax expense increased by $6 million in the third quarter of 2016 and decreased by $28 million in the first nine months of 2016. The increase for the quarter was primarily due to an increase in non-deductible expenses in 2016, as well as adjustments recognized in 2015 from the settlements of prior years' income tax-related matters. The decrease for the nine-month period was primarily due to a $48 million non-cash adjustment in the second quarter of 2015 to revalue deferred income tax liabilities arising from an increase in the Alberta provincial corporate tax rate, and a $23 million recovery recorded in 2015 related to the settlement of prior years' income tax-related matters (excluding related interest income).
Comprehensive income
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Net income 355 365 (2.7)% 1,149 1,121 2.5%
Other comprehensive
income (loss) (net of
income taxes):
Items that may be
subsequently
reclassified to
income - 14 (100.0)% (10) 14 n/m
Item never
subsequently
reclassified to
income - Employee
defined benefit plans
re-measurements 150 (156) n/m 167 (41) n/m
----------------------------------------------------------------------------
Comprehensive income 505 223 126.5% 1,306 1,094 19.4%
----------------------------------------------------------------------------
Comprehensive income increased by $282 million in the third quarter of 2016 and $212 million in the first nine months of 2016, primarily due to increases in employee defined benefit plan re-measurement amounts due to returns on pension plan assets. Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges, foreign currency translation adjustments arising from translating financial statements of foreign operations, and changes in the unrealized fair value of available-for-sale investments.
5.4 Wireless segment
Wireless operating
indicators
----------------------------------------------------------------------------
As at September 30 2016 2015 Change
----------------------------------------------------------------------------
Subscribers
(000s):
Postpaid(1) 7,463 7,290 2.4%
Prepaid 1,044 1,131 (7.7)%
----------------------------------------------------------------------------
Total 8,507 8,421 1.0%
----------------------------------------------------------------------------
Postpaid
proportion of
subscriber base
(%) 87.7 86.6 1.1pts.
HSPA+ population
coverage(2)
(millions) 35.7 35.7 -%
LTE population
coverage(2)
(millions) 35.1 34.3 2.3%
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ -----------------------------
2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Subscriber gross
additions (000s):
Postpaid 283 269 5.2% 742 741 0.1%
Prepaid 96 121 (20.7)% 259 331 (21.8)%
----------------------------------------------------------------------------
Total 379 390 (2.8)% 1,001 1,072 (6.6)%
----------------------------------------------------------------------------
Subscriber net
additions
(losses) (000s):
Postpaid 87 69 26.1% 156 182 (14.3)%
Prepaid (7) - n/m (61) (42) (45.2)%
----------------------------------------------------------------------------
Total 80 69 15.9% 95 140 (32.1)%
----------------------------------------------------------------------------
Blended ARPU, per
month(3) ($) 66.67 64.22 3.8% 64.72 63.35 2.2%
Churn, per
month(3)(%)
Blended 1.18 1.28 (0.10)pts. 1.20 1.24 (0.04)pts.
Postpaid 0.94 0.97 (0.03)pts. 0.93 0.91 0.02pts.
Cost of
acquisition (COA)
per gross
subscriber
addition(3) ($) 435 400 8.8% 437 399 9.5%
Retention spend to
network
revenue(3) (%) 14.6 14.3 0.3pts. 13.7 12.8 0.9pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Subsequent to a review of our subscriber base during the first quarter of
2016, our 2016 opening postpaid subscriber base was reduced by 45,000.
2. Including network access agreements with other Canadian carriers.
3. These are industry measures useful in assessing operating performance of
a wireless company, but are not measures defined under IFRS. (See Section
11.2 Operating indicators.)
----------------------------------------------------------------------------
Operating revenues - Wireless segment
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
----------------------- --------------------------
($ millions, except
ratios) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Network revenues 1,679 1,600 4.9% 4,860 4,703 3.3%
Equipment and other
services 135 165 (18.2)% 382 456 (16.2)%
----------------------------------------------------------------------------
Revenues arising from
contracts with customers 1,814 1,765 2.8% 5,242 5,159 1.6%
Other operating income 4 2 100.0% 32 2 n/m
----------------------------------------------------------------------------
External operating
revenues 1,818 1,767 2.9% 5,274 5,161 2.2%
Intersegment network
revenue 15 16 (6.3)% 43 44 (2.3)%
----------------------------------------------------------------------------
Total operating revenues 1,833 1,783 2.8% 5,317 5,205 2.2%
----------------------------------------------------------------------------
Total wireless operating revenues increased by $50 million in the third quarter of 2016 and $112 million in the first nine months of 2016.
Network revenues from external customers increased by $79 million in the third quarter of 2016 and $157 million in the first nine months of 2016. Data network revenue increased by 10.6% in the third quarter of 2016 and 8.8% in the first nine months of 2016, reflecting: (i) a larger proportion of higher-rate two-year plans in the revenue mix; (ii) increased adoption of larger data buckets; (iii) growth in the subscriber base; (iv) a higher postpaid subscriber mix; and (v) increasing data usage from data-intensive devices. Voice network revenue decreased by 2.4% in the third quarter of 2016 and 3.3% in the first nine months of 2016 due to the increased adoption of unlimited nationwide voice plans and continued but moderating substitution to data services, partly offset by growth in the subscriber base.
-- Monthly blended ARPU was $66.67 in the third quarter and $64.72 in the
first nine months of 2016, reflecting increases of $2.45 or 3.8% for the
quarter and $1.37 or 2.2% for the nine-month period. The increases were
primarily driven by effects of higher data network revenue (as described
above), partly offset by continued declines in voice revenue.
-- Gross subscriber additions decreased by 11,000 in the third quarter of
2016 and 71,000 for the nine-month period of 2016. Postpaid gross
additions increased by 14,000 in the third quarter of 2016 and 1,000 for
the first nine months of 2016. The increases in postpaid gross additions
were due to the success of targeted promotions and our focused marketing
efforts on higher-value postpaid loading, partly offset by competitive
intensity and the effects of the economic slowdown, particularly in
Alberta. Prepaid gross additions decreased by 25,000 in the third
quarter of 2016 and 72,000 in the first nine months of 2016, mainly from
competitive intensity and our focused marketing efforts on higher-value
postpaid loading.
-- Our average monthly postpaid subscriber churn rate was 0.94% in the
third quarter of 2016 and 0.93% in the first nine months of 2016, as
compared to 0.97% and 0.91%, respectively, in the same periods in 2015.
The continuing low postpaid subscriber churn rates during the third
quarter and nine-month period of 2016 reflect our focus on executing on
customers first initiatives, and retention programs, partly offset by
competitive intensity and the effects of the economic slowdown,
particularly in Alberta, and for the nine-month period, the simultaneous
expiration of two-year and three-year customer contracts starting in
June 2015. Our blended monthly subscriber churn rate was 1.18% in the
third quarter of 2016 and 1.20% in the first nine months of 2016, as
compared to 1.28% and 1.24%, respectively, in the same periods in 2015.
The improvement in our blended subscriber churn rate during the third
quarter and nine-month period of 2016 reflect the changes in the
postpaid churn rate as described above, as well as improvements in the
prepaid churn rate as well as increase in mix of postpaid subscribers.
-- Net subscriber additions increased by 11,000 in the third quarter of
2016 due to an improvement in our blended monthly churn rate. In the
first nine months of 2016, net subscriber additions declined 45,000 due
to lower gross additions, partly offset by an improvement in blended
monthly churn rate. Postpaid net additions increased by 18,000 in the
third quarter of 2016 and decreased by 26,000 in the first nine months
of 2016, due to the factors affecting gross subscriber additions and
postpaid churn described above. Prepaid subscribers decreased by 7,000
in the third quarter of 2016 and 61,000 in the first nine months of
2016, as compared to no change and a decrease of 42,000, respectively,
in the same periods in 2015. Prepaid losses reflect conversions to
postpaid services (due to our marketing efforts focused on higher-value
postpaid loading) and increased competition for prepaid services.
Equipment and other services decreased by $30 million in the third quarter of 2016 and $74 million in the first nine months of 2016, resulting from a combination of higher per-unit subsidies, lower retention volumes, competitive intensity and the discontinuance of Black's Photography revenue from the closure of stores in August 2015, partly offset by increased postpaid gross additions in the quarter and higher-value smartphones in the sales mix.
Other operating income increased by $2 million in the third quarter of 2016 and $30 million in the first nine months of 2016, mainly due to net gains and equity income related to real estate joint venture developments, gains from the sale of property, plant and equipment, as well as the gain from the exchange of wireless spectrum licences in the second quarter of 2016.
Intersegment network revenue in the wireless segment represents network services provided to the wireline segment. Such revenues are eliminated upon consolidation along with the associated expenses in wireline.
Operating expenses - Wireless segment
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Goods and services
purchased:
Equipment sales
expenses 437 425 2.8% 1,171 1,143 2.4%
Network operating
expenses 200 197 1.5% 573 569 0.7%
Marketing expenses 101 113 (10.6)% 289 307 (5.9)%
Other (1) 170 151 12.6% 486 487 (0.2)%
Employee benefits
expense(1) 166 182 (8.8)% 490 521 (6.0)%
----------------------------------------------------------------------------
Total operating expenses 1,074 1,068 0.6% 3,009 3,027 (0.6)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Includes restructuring and other costs. (See Section 11.1 Non-GAAP and
other financial measures.)
----------------------------------------------------------------------------
Total wireless operating expenses increased by $6 million in the third quarter of 2016 and decreased by $18 million in the first nine months of 2016.
Equipment sales expenses increased by $12 million in the third quarter of 2016 and $28 million in the first nine months of 2016, reflecting an increase in higher-value smartphones in the sales mix and increasing handset costs (including the effect of higher supplier costs due to the decline in the Canadian dollar exchange rate vs. the U.S. dollar over the last two years) and increased postpaid gross additions in the quarter, partly offset by lower retention volumes, lower prepaid gross additions, and by lower cost of sales from the closure of Black's Photography stores in August 2015.
-- Retention costs as a percentage of network revenue were 14.6% in the
third quarter of 2016 and 13.7% in the first nine months of 2016,
compared to 14.3% and 12.8%, respectively, in the same periods in 2015.
The increases were driven by higher per-unit subsidy costs reflecting
the factors noted in Equipment sales expense above, partly offset by
lower retention volumes.
-- COA per gross subscriber addition was $435 in the third quarter of 2016
and $437 in the first nine months of 2016, reflecting increases of $35
and $38, respectively, in the same periods in 2015. These increases
reflect the factors noted in Equipment sales expense above, partly
offset by lower advertising and promotional costs.
Network operating expenses increased by $3 million in the third quarter of 2016 and $4 million in the first nine months of 2016, mainly from higher roaming costs from increased roaming volumes partly offset by lower maintenance costs.
Marketing expenses declined by $12 million in the third quarter of 2016 and $18 million in the first nine months of 2016, primarily due to lower advertising and promotions expenses, as well as lower commission expenses driven by lower gross additions and retention volumes.
Other goods and services purchased increased by $19 million in the third quarter of 2016, primarily due to increases in external labour, higher non-labour restructuring and other costs, as well as higher bad debt provisions to support the growing subscriber base. Other goods and services purchased were relatively flat in the first nine months of 2016, as lower non-labour restructuring and other costs mainly from provisions for the closure of Black's Photography retail stores during the third quarter of 2015 were offset by higher external labour and other administrative costs and an increase in bad debt provisions.
Employee benefits expense decreased by $16 million in the third quarter of 2016 and $31 million in the first nine months of 2016, reflecting lower salaries and wages driven by a reduction in FTEs from our ongoing operational efficiency and effectiveness initiatives, lower share-based compensation expenses, and lower labour-related restructuring costs, partly offset by inflationary compensation increases.
EBITDA - Wireless segment
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
-------------------------- ------------------------------
($ millions,
except margins) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
EBITDA 759 715 6.2% 2,308 2,178 6.0%
Add back
restructuring
and other costs 18 14 28.6% 36 56 (35.7)%
----------------------------------------------------------------------------
EBITDA -
excluding
restructuring
and other costs 777 729 6.6% 2,344 2,234 4.9%
Deduct gain on
the exchange of
wireless
spectrum
licences - - n/m (15) - n/m
Deduct net gains
and equity
income from
real estate
joint venture
developments (4) - n/m (8) - n/m
----------------------------------------------------------------------------
Adjusted EBITDA 773 729 6.1% 2,321 2,234 3.9%
----------------------------------------------------------------------------
EBITDA margin
(%) 41.4 40.1 1.3pts. 43.4 41.8 1.6pts.
Adjusted EBITDA
margin(1) (%) 42.3 40.9 1.4pts. 43.8 42.9 0.9pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. The calculation of the adjusted EBITDA margin excludes the net gains and
equity income from real estate joint venture developments, as well as the
gain on the exchange of wireless spectrum licences from both EBITDA and
Operating revenues, and excludes restructuring and other costs from
EBITDA.
----------------------------------------------------------------------------
Wireless EBITDA increased by $44 million in the third quarter of 2016 and $130 million in the first nine months of 2016, including gains, as detailed in the table above. Wireless adjusted EBITDA increased by $44 million in the third quarter of 2016 and $87 million in the first nine months of 2016, reflecting network revenue growth driven by higher ARPU and a larger customer base, as well as ongoing operational efficiency and effectiveness initiatives, partly offset by higher acquisition and retention spending.
5.5 Wireline segment
Wireline operating indicators
----------------------------------------------------------------------------
At September 30 (000s) 2016 2015 Change
----------------------------------------------------------------------------
Subscriber connections:
High-speed Internet
subscribers(1) 1,631 1,544 5.6%
TELUS TV subscribers 1,043 980 6.4%
Residential NALs 1,396 1,491 (6.4)%
----------------------------------------------------------------------------
Total wireline
subscriber
connections(1) 4,070 4,015 1.4%
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Subscriber net additions
(losses):
High-speed Internet 14 24 (41.7)% 44 69 (36.2)%
TELUS TV 14 26 (46.2)% 38 64 (40.6)%
Residential NALs (25) (25) -% (71) (65) (9.2)%
----------------------------------------------------------------------------
Total wireline
subscriber connections
net additions (losses) 3 25 (88.0)% 11 68 (83.8)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Effective December 31, 2015, business NALs have been removed from the
reported subscriber base due to the measure's diminishing relevance as a
key performance indicator and, as such, our January 1, 2015 opening
reported subscriber balance has been retrospectively adjusted to exclude
1,613,000 business NALs. In addition, subsequent to a review of our
subscriber base during the first quarter of 2016, our 2016 opening high-
speed Internet subscriber base was increased by 21,000.
----------------------------------------------------------------------------
Operating revenues - Wireline segment
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Data service and
equipment 1,025 950 7.9% 3,008 2,781 8.2%
Voice service 335 373 (10.2)% 1,023 1,138 (10.1)%
Other services and
equipment 51 53 (3.8)% 164 166 (1.2)%
----------------------------------------------------------------------------
Revenues arising from
contracts with
customers 1,411 1,376 2.5% 4,195 4,085 2.7%
Other operating income 9 12 (25.0)% 25 39 (35.9)%
----------------------------------------------------------------------------
External operating
revenues 1,420 1,388 2.3% 4,220 4,124 2.3%
Intersegment revenue 48 44 9.1% 143 130 10.0%
----------------------------------------------------------------------------
Total operating revenues 1,468 1,432 2.5% 4,363 4,254 2.6%
----------------------------------------------------------------------------
Total wireline operating revenues increased by $36 million in the third quarter of 2016 and $109 million in the first nine months of 2016.
-- Data service and equipment revenues increased by $75 million in the
third quarter of 2016 and $227 million in the first nine months of 2016,
primarily due to: (i) growth in business process outsourcing revenues;
(ii) increased Internet and enhanced data service revenues resulting
from a 5.6% increase in our high-speed Internet subscribers over 12
months, higher revenue per customer from upgrades to faster Internet
speeds and larger usage Internet rate plans, subscribers coming off of
promotional offers, the phased-in introduction of usage-based billing in
2015 and certain rate increases; and (iii) increased TELUS TV revenues
resulting from a 6.4% subscriber growth over 12 months and higher
revenue per customer including certain rate increases, as well as
promotional offers. This growth was partly offset by a decline in data
equipment revenues in the business market related to the economic
slowdown, particularly in Alberta.
-- Voice service revenues decreased by $38 million in the third quarter of
2016 and $115 million in the first nine months of 2016. The decreases
reflect the ongoing decline in legacy revenues from technological
substitution, the economic slowdown, increased competition, greater use
of inclusive long distance plans and lower long distance minutes of use
including lower wholesale volumes, partially offset by certain rate
increases. We experienced a 5.9% decline in residential NALs in the 12-
month period ended September 30, 2016.
-- Wireline subscriber connections net additions were 3,000 in the third
quarter of 2016 and 11,000 in the first nine months of 2016, reflecting
decreases of 22,000 and 57,000, respectively, over the same periods in
2015.
Net additions of high-speed Internet subscribers declined by 10,000 in
the third quarter of 2016 and 25,000 in the first nine months of 2016.
The decreases resulted from the effects of heightened competitive
intensity and the impact of the economic slowdown, resulting in lower
gross additions and increased churn, partly offset by the continued
expansion of our high-speed broadband footprint, including fibre to the
premises, as well as the pull-through impact from the continued adoption
of Optik TV. Net additions of TELUS TV subscribers were down 12,000 in
the third quarter of 2016 and 26,000 in the first nine months of 2016.
The decreases reflected lower gross additions, a higher customer churn
rate and a decline in satellite subscribers due to the effects of
heightened competitive intensity including from OTT services, slower
subscriber growth for paid TV services, the economic slowdown, and a
high rate of market penetration for TV services. These were partly
offset by the ongoing expansion of our addressable high-speed broadband
footprint and increasing broadband speeds. Continued focus on expanding
our addressable high-speed Internet and Optik TV footprint, connecting
more homes and business directly to fibre, and bundling these services
together, resulted in combined Internet and TV subscriber growth of
150,000 or 5.9% over the last 12 months.
Residential NAL losses were 25,000 in the third quarter of 2016 and
71,000 in the first nine months of 2016, as compared to NAL losses of
25,000 and 65,000, respectively, for the same periods in 2015. The
residential NAL losses continue to reflect the economic slowdown, the
ongoing trend of substitution to wireless and Internet-based services,
and increased competition, partially mitigated by the success of our
bundled service offerings and our customers first initiatives.
-- Other services and equipment decreased by $2 million in the third
quarter and first nine months of 2016, mainly due to declines in voice
equipment sales.
-- Other operating income decreased by $3 million in the third quarter of
2016 and $14 million in the first nine months of 2016, mainly due to a
decrease in amounts recognized from the regulatory price cap deferral
account for provisioning broadband Internet services to eligible rural
and remote communities, as well as certain business acquisition-related
provisions. Partly offsetting this decline was net gains and equity
income on real estate joint venture developments.
-- Intersegment revenue represents services provided to the wireless
segment. Such revenue is eliminated upon consolidation along with the
associated expenses in wireless.
Operating expenses - Wireline segment
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Goods and services
purchased(1) 581 568 2.3% 1,724 1,718 0.3%
Employee benefits
expense(1) 515 511 0.8% 1,487 1,430 4.0%
----------------------------------------------------------------------------
Total operating expenses 1,096 1,079 1.6% 3,211 3,148 2.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Includes restructuring and other costs. (See Section 11.1 Non-GAAP and
other financial measures.)
----------------------------------------------------------------------------
Total wireline operating expenses increased by $17 million in the third quarter of 2016 and $63 million in the first nine months of 2016.
-- Goods and services purchased increased by $13 million in the third
quarter of 2016 and $6 million in the first nine months of 2016, due to
increased network operating and administrative costs to support our
growing subscriber base, and higher advertising and promotional expenses
related to bundled offerings and in response to heightened competitive
intensity, as well as higher TELUS TV costs of sales, partly offset by
lower transit and termination costs and lower equipment costs related to
declining equipment revenue.
-- Employee benefits expense increased slightly by $4 million in the third
quarter of 2016 and $57 million in the first nine months of 2016,
primarily due to increases in wages and salaries, mainly due to growth
in the number of TELUS International employees to support increased
business process outsourcing revenue growth, as well as inflationary
compensation increases and higher labour restructuring costs from
ongoing operational efficiency and effectiveness initiatives. These were
partly offset by lower defined benefit pension plan and share-based
compensation expenses, and lower compensation and benefits costs
resulting from a decrease in the number of domestic FTE employees.
EBITDA - Wireline segment
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ ----------------------------
($ millions, except
margins) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
EBITDA 372 353 5.1% 1,152 1,106 4.1%
Add back
restructuring and
other costs 42 37 13.5% 95 71 33.8%
----------------------------------------------------------------------------
EBITDA - excluding
restructuring and
other costs 414 390 6.2% 1,247 1,177 5.9%
Deduct net gains
and equity income
from real estate
joint venture
developments (6) - n/m (11) - n/m
----------------------------------------------------------------------------
Adjusted EBITDA 408 390 4.2% 1,236 1,177 5.0%
----------------------------------------------------------------------------
EBITDA margin (%) 25.3 24.7 0.6pts. 26.4 26.0 0.4pts.
Adjusted EBITDA
margin(1) (%) 27.8 27.3 0.5pts. 28.3 27.7 0.6pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. The calculation of the Adjusted EBITDA margin excludes the net gains and
equity income on real estate joint venture developments from both EBITDA
and Operating revenues, and excludes restructuring and other costs from
EBITDA.
----------------------------------------------------------------------------
Wireline EBITDA increased by $19 million in the third quarter of 2016, primarily from growth in the data service margin, as well as net revenue impacts from the real estate joint venture developments, partly offset by continued declines in legacy voice services, higher restructuring and other costs, and the impact of the economic slowdown on the business market, particularly in Alberta. In the first nine months of 2016, wireline EBITDA increased by $46 million due to similar factors as noted for the third quarter, and was negatively impacted by year-to-date costs and revenue impacts of $3 million related to the wildfires in northern Alberta. Wireline adjusted EBITDA increased by 4.2% and 5.0%, respectively, in the third quarter and nine-month period, as compared to operating revenue increases of 2.1% and 2.3%, respectively, excluding the net revenue impacts from the real estate joint venture developments. This reflects our execution on cost efficiency programs, as well as improving margins in data services, including Internet, business process outsourcing services, TELUS TV and TELUS Health services.
6. Changes in financial position
-------------------------------- -------------------------------------------
Financial
position at: Sept. 30 Dec. 31 Change Change includes:
----------------
($ millions) 2016 2015
----------------------------------------------------------------------------
Current assets
Cash and 410 223 187 84% See Section 7 Liquidity
temporary and capital resources
investments,
net
Accounts 1,422 1,428 (6) -% n/m
receivable
Income and other 85 1 84 n/m An increase due to the
taxes timing of tax instalments
receivable in excess of current
income tax expense
Inventories 262 360 (98) (27)% A decrease in wireless
handset inventory due to
a lower volume of
handsets on hand at the
end of the third quarter
Prepaid expenses 307 213 94 44% Prepaid expenses
increased due to the
annual prepayment of
statutory employee
benefits, maintenance
contracts, property taxes
and annual wireless
spectrum licence fees,
net of amortization
Real estate - 66 (66) (100)% Repayment of construction
joint venture credit facility
advances concurrent with
commencement of closing
of residential
condominium unit sales
Current 11 40 (29) (73)% A decrease in U.S.
derivative currency hedging items.
assets
----------------------------------------------------------------------------
Current
liabilities
Short-term 100 100 - -% See Section 7.7 Sale of
borrowings trade receivables
Accounts payable 2,181 1,990 191 10% An increase in payables
and accrued associated with higher
liabilities capital expenditures,
partly offset by lower
payroll and employee-
related liabilities
Income and other 37 108 (71) (66)% Decreased primarily due
taxes payable to the final tax payment
for the 2015 taxation
year made in the first
quarter of 2016
Dividends 272 263 9 3% n/m
payable
Advance billings 747 760 (13) (2)% A decrease in advance
and customer billings arising from a
deposits lower number of wireless
handsets shipped to
external distribution
channels, as well as a
decrease in the
regulatory price cap
deferral account
resulting from
recognition of amounts
for provisioning
broadband Internet
services to eligible
rural and remote
communities
Provisions 170 197 (27) (14)% Amounts paid out under
restructuring initiatives
exceeded new
restructuring provisions
Current 850 856 (6) (1)% A decrease of $119
maturities of million in outstanding
long-term debt commercial paper, as well
as amounts reclassified
from long-term debt
relating to upcoming
maturity of $700 million
of our 4.95% Notes,
Series CD in March 2017,
offset by the maturation
of $600 million of our
3.65% Notes, Series CI in
May 2016
Current 12 2 10 n/m An increase in U.S.
derivative currency hedging items.
liabilities
----------------------------------------------------------------------------
Working capital (1,872) (1,945) 73 4% Current assets increased
(Current assets by $166 million, while
subtracting Current liabilities
Current increased by $93 million.
liabilities) TELUS historically has
had a negative working
capital position. See
Capital structure
management policies in
Section 4.3 of this MD&A
and the Liquidity risk
discussion in Section 7.9
of our 2015 annual MD&A.
----------------------------------------------------------------------------
Non-current
assets
Property, plant 10,297 9,736 561 6% See Capital expenditures
and equipment, in Section 7.3 Cash used
net by investing activities
and Depreciation in
Section 5.3
Intangible 10,292 9,985 307 3% See Capital expenditures
assets, net in Section 7.3 Cash used
by investing activities
and Amortization of
intangible assets in
Section 5.3
Goodwill, net 3,776 3,761 15 -% An increase from minor
acquisitions.
Other long-term 830 593 237 40% Pension and post-
assets retirement assets
increased due to positive
returns earned on plan
assets.
----------------------------------------------------------------------------
Non-current
liabilities
Provisions 432 433 (1) -% n/m
Long-term debt 11,604 11,182 422 4% See Section 7.4 Cash
provided (used) by
financing activities
Other long-term 731 688 43 6% Primarily an increase in
liabilities the accrual for share-
based compensation.
Deferred income 2,263 2,155 108 5% Primarily relates to
taxes returns on pension plan
assets, as well as
deferred income tax
expense.
----------------------------------------------------------------------------
Owners' equity
Common equity 8,281 7,672 609 8% Includes Net income of
$1,142 million, Other
comprehensive income of
$156 million, impact on
contributed surplus
arising from subsidiary
issuance of shares to
non-controlling interest
of $236 million, net of
dividend declarations of
$807 million, and share
purchase activity under
our normal course issuer
bid program of $118
million (see Section 7.4
Cash provided (used) by
financing activities)
Non-controlling 12 - 12 n/m Impact arising from the
interest 35% non-controlling
interest in TELUS
International (Cda) Inc.
----------------------------------------------------------------------------
7. Liquidity and capital resources
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this MD&A.
7.1 Overview
Our capital structure financial policies and report on financing and capital structure management plans are described in Section 4.3.
Cash flows
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------ --------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Cash provided by
operating activities 1,032 1,025 0.7% 2,487 2,686 (7.4)%
Cash used by investing
activities (680) (549) (23.9)% (2,075) (3,852) 46.1%
Cash provided (used) by
financing activities (370) (412) 10.2% (225) 1,247 n/m
----------------------------------------------------------------------------
Increase (decrease) in
Cash and temporary
investments, net (18) 64 n/m 187 81 130.9%
Cash and temporary
investments, net,
beginning of period 428 77 n/m 223 60 n/m
----------------------------------------------------------------------------
Cash and temporary
investments, net, end
of period 410 141 n/m 410 141 n/m
----------------------------------------------------------------------------
7.2 Cash provided by operating activities
Cash provided by operating activities increased by $7 million in the third quarter of 2016 and decreased by $199 million in the first nine months of 2016.
Analysis of changes in cash provided by
operating activities
----------------------------------------------------------------------------
Nine-month
($ millions) Third quarter period
----------------------------------------------------------------------------
Cash provided by operating activities,
three-month and nine-month periods ended
September 30, 2015 1,025 2,686
Changes:
Higher EBITDA (See Section 5.4 Wireless
segment and Section 5.5 Wireline
segment) 63 176
(Higher) lower share-based compensation
cash outflows, net of expense (11) 25
Lower employer contributions to defined
benefits plans, net of expense 2 1
Lower (higher) restructuring
disbursements, net of restructuring
expenses 6 (68)
Higher interest paid, net of interest
received (17) (60)
Higher income taxes paid, net of
recoveries received (77) (322)
Other operating working capital changes 41 49
----------------------------------------------------------------------------
Cash provided by operating activities,
three-month and nine-month periods ended
September 30, 2016 1,032 2,487
----------------------------------------------------------------------------
-- Restructuring disbursements, net of expenses, for the first nine months
of 2016 increased as a result of various operational efficiency and
effectiveness initiatives in 2015 and 2016, including the reduction of
full-time equivalent (FTE) positions announced in November 2015.
-- Income taxes paid, net of refunds received, increased in the third
quarter and the first nine months of 2016. The increase in the quarter
reflects higher required instalment payments, as well as higher refunds
received in the comparative period in 2015. The increase for the nine-
month period also includes a larger final income tax payment in the
first quarter of 2016 in respect of the 2015 income tax year than was
required in the first quarter of 2015 in respect of the 2014 income tax
year, mainly due to the use of Public Mobile losses in 2014.
7.3 Cash used by investing activities
Cash used by investing activities increased by $131 million in the third quarter of 2016 and decreased by nearly $1.8 billion in the first nine months of 2016. The changes included the following:
-- An increase of $95 million in Cash payments for capital assets
(excluding spectrum licences) in the third quarter of 2016 and $68
million in the first nine months of 2016. These increases were composed
of:
-- An increase of $164 million in capital expenditures in the third
quarter of 2016 and $252 million in the first nine months of 2016
(see Capital expenditure measures table and discussion below)
-- Lower capital expenditure payments with respect to payment timing
differences, as associated Accounts payable and accrued liabilities
increased by $69 million in the third quarter of 2016 and $184
million in the first nine months of 2016.
-- Cash payments for spectrum licences were $NIL in the third quarter of
2016 and $145 million in the first nine months of 2016. Comparatively,
we paid $12 million in the third quarter of 2015 and $2 billion in the
first nine months of 2015 for the AWS-3 and 2500 MHz spectrum licences
acquired in Innovation, Science and Economic Development Canada's (ISED)
wireless spectrum auctions.
-- Cash payments for acquisitions complementary to our existing lines of
business were $14 million in the third quarter and $16 million in the
first nine months of 2016.
-- Receipts from real estate joint ventures, net of advances and
contributions, were in the amount of $45 million in the third quarter of
2016 and $63 million in the first nine months of 2016, mainly from
repayment of construction financing from the TELUS Garden real estate
joint venture. For the comparable periods in 2015, receipts from the
real estate joint ventures, net of advances and contributions, were $81
million and $59 million, respectively, resulting mainly from a $95
million repayment of construction financing from the TELUS Garden real
estate joint venture pursuant to its bond issuance for the office tower
in July 2015.
Capital expenditure measures
----------------------------------------------------------------------------
Third quarters ended Nine-month periods ended
September 30 Sept. 30
------------------------- -----------------------------
($ millions,
except capital
intensity) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Capital
expenditures
excluding
spectrum
licences(1)
Wireless segment 295 209 41.1% 733 684 7.2%
Wireline segment 492 414 18.8% 1,441 1,238 16.4%
----------------------------------------------------------------------------
Consolidated 787 623 26.3% 2,174 1,922 13.1%
----------------------------------------------------------------------------
Wireless segment
capital intensity
(%) 16 12 4pts. 14 13 1pt.
Wireline segment
capital intensity
(%) 34 29 5pts. 33 29 4pts.
Consolidated
capital
intensity(2) (%) 24 20 4pts. 23 21 2pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Capital expenditures include assets purchased, but not yet paid for, and
therefore differ from Cash payments for capital assets, as presented on
the interim consolidated statements of cash flows.
2. See Section 11.1 Non-GAAP and other financial measures.
----------------------------------------------------------------------------
Wireless segment capital expenditures increased in 2016 by $86 million in the third quarter and $49 million year to date. The increases were primarily due to continued investments in our fibre-optic network to support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G, as well as increased spending on the deployment of 700 MHz and 2500 MHz spectrum licences. We also continued to invest in system and network resiliency and reliability in support of our ongoing customers first initiatives and to ready the network and systems for future retirement of legacy assets.
Wireline segment capital expenditures increased in 2016 by $78 million in the third quarter and $203 million year to date. The increases were primarily due to continuing investments in our broadband infrastructure, including connecting more homes and businesses directly to our fibre-optic network. This investment supports our high-speed Internet and Optik TV subscriber growth, as well as our customers' demand for faster Internet speeds, and extends the reach and functionality of our business and healthcare solutions. We also continued to make investments in system and network resiliency and reliability.
7.4 Cash provided (used) by financing activities
Net cash used by financing activities was $370 million in the third quarter of 2016, as compared to $412 million net cash used by financing activities in the third quarter of 2015. Net cash used by financing activities was $225 million in the first nine months of 2016, as compared to net cash provided by financing activities of $1.25 billion in the first nine months of 2015. Financing activities included the following:
Dividends paid to the holders of Common Shares
Dividends paid to the holders of Common Shares totalled $274 million in the third quarter of 2016, an increase of $21 million from the third quarter of 2015. Dividends paid for the first nine months of 2016 were $798 million, an increase of $58 million from the first nine months of 2015. The increases reflect higher dividend rates under our dividend growth program (see Section 4.3), partially offset by lower outstanding shares resulting from shares purchased and cancelled under our normal course issuer bid (NCIB) program. Subsequent to September 30, 2016, we paid dividends of $272 million to the holders of Common Shares in October 2016. Dividends paid to our shareholders in 2016 totalled $1,070 million.
Purchase of Common Shares for cancellation
Under our 2016 NCIB, we purchased 441,700 shares for $19 million in the third quarter of 2016 and purchased approximately 3 million shares for $130 million in the first nine months of 2016. Our 2016 NCIB concluded on September 14, 2016. Our 2017 NCIB commenced September 30, 2016. See Section 4.3 for details of our planned multi-year share purchase program.
Normal course issuer bid purchases in 2016
----------------------------------------------------------------------------
Common
Shares Increase
purchased Average (decrease)
and purchase Purchase in Accounts
cancelled price per costs payable Cash outflow
Period (millions) share ($)($ millions)($ millions) ($ millions)
----------------------------------------------------------------------------
First quarter 1 37.77 50 (10) 60
Second quarter 2 38.43 61 - 61
Third quarter - 42.92 19 - 19
----------------------------------------------------------------------------
Total 3 38.76 130 (10) 140
----------------------------------------------------------------------------
Short-term borrowings
Short-term borrowings are composed primarily of amounts advanced to us from an arm's-length securitization trust pursuant to the transfer of receivables securitization transactions (see Section 7.7 Sale of trade receivables). Such proceeds were $100 million at September 30, 2016, unchanged since September 30, 2015. In the comparative periods, such proceeds had increased from $100 million at March 31, 2015, to $500 million at June 30, 2015, and subsequently decreased to $100 million at September 30, 2015.
Long-term debt issues and repayments
For the third quarter of 2016, long-term debt repayments, net of issues, were $67 million, primarily composed of:
-- A reduction in commercial paper to a balance of $137 million (U.S.$104
million) at September 30, 2016, from $975 million (U.S.$755 million) at
June 30, 2016.
-- The September 2016 public issue of U.S.$600 million of senior unsecured
notes at 2.80%, due February 16, 2027. As of the date of this MD&A, the
proceeds were used to repay U.S.$453 million of commercial paper, with
the balance to be used for general corporate purposes. We have entered
into a foreign exchange derivative (a cross currency interest rate
exchange agreement) which effectively converted the principal payments
and interest obligations to Canadian dollar obligations with an
effective fixed interest rate of 2.95% and an effective issued and
outstanding amount of $792 million (reflecting a fixed exchange rate of
$1.3205). For additional information on these notes, please refer to
Note 21(b) of the interim consolidated financial statements.
For the first nine months of 2016, long-term debt issues net of repayments were $437 million, resulting primarily from the September debt issue, a $119 million (U.S.$81 million) net decrease in commercial paper from $256 million (U.S.$185 million) at December 31, 2015, and $361 million, net, drawn on the TELUS International (Cda) Inc. (TI) credit facility as at September 30, 2016, net of the $600 million repayment of Series CI Notes in May 2016.
In comparison, long-term debt issues, net of repayments, were $380 million in the third quarter of 2015 and $2.4 billion in the first nine months of 2015, and were primarily composed of:
-- A March 24, 2015, public issue of $1.75 billion in senior unsecured
notes in three series: a $250 million offering at 1.50% due March 27,
2018, a $1.0 billion offering at 2.35% due March 28, 2022, and a $500
million offering at 4.40% due January 29, 2046. The net proceeds were
used to fund a portion of the $1.5 billion purchase price of the AWS-3
wireless spectrum licences and the remainder was used for general
corporate purposes.
-- An increase in commercial paper during the third quarter of 2015 from
$NIL at June 30, 2015, to $787 million at September 30, 2015, all of
which was denominated in U.S. dollars (U.S.$589 million). For the first
nine months of 2015, commercial paper increased by a net $657 million.
-- A decrease in amounts drawn on our five-year revolving credit facility
during the third quarter of 2015 from $400 million at June 30, 2015, to
$NIL at September 30, 2015 ($NIL at December 31, 2014).
Our average term to maturity of long-term debt (excluding commercial paper and the revolving component of the TI credit facility) has increased to approximately 10.7 years at September 30, 2016, compared to approximately 10.6 years at September 30, 2015. Additionally, our weighted average cost of long-term debt (excluding commercial paper and the revolving component of the TI credit facility) was 4.23% at September 30, 2016, as compared to 4.32% at June 30, 2016 and 4.42% at September 30, 2015.
Issue of shares by subsidiary to non-controlling interest
In June 2016, a subsidiary issued shares to Baring Private Equity Asia for it to acquire a 35% non-controlling interest in TI. Cash proceeds net of issue costs currently paid were $291 million as at September 30, 2016.
7.5 Liquidity and capital resource measures
Net debt was $12.2 billion at September 30, 2016, an increase of $0.5 billion from one year earlier, resulting mainly from the U.S.$600 million Note issue in September 2016.
Fixed-rate debt as a proportion of total indebtedness was 95% at September 30, 2016, up from 92% one year earlier, mainly due to the U.S. dollar Note issue and a decrease in commercial paper, which emulates floating-rate debt, partially offset by the amounts drawn on the TI credit facility.
Net debt to EBITDA - excluding restructuring and other costs ratio was 2.62 times, as measured at September 30, 2016, down slightly from one year earlier. Our long-term objective for this measure is within a range of 2.00 to 2.50 times, which we believe is consistent with maintaining investment grade credit ratings in the range of BBB+, or the equivalent and providing reasonable access to capital. As at September 30, 2016, this ratio remains outside of the long-term objective range due to prior issuance of incremental debt primarily for the acquisition in 2014 and 2015 of spectrum licences for approximately $3.6 billion, which were auctioned in unprecedented amounts and in atypical concentrations during those years, offset by growth in EBITDA - excluding restructuring and other costs. These acquired licences have more than doubled our national spectrum holdings and represent an investment to extend our network capacity to support continuing data consumption growth, as well as growth in our wireless customer base. We will endeavour to return this ratio to within the objective range in the medium term, as we believe that this range is supportive of our long-term strategy. While this ratio exceeds our long-term objective range, we are well in compliance with the leverage ratio covenant in our credit facilities, which states that we may not permit our net debt to operating cash flow ratio to exceed 4.00:1.00 (see Section 7.6 Credit facilities).
Liquidity and capital resource measures ---------------------------------------------------------------------------- As at, or 12-month periods ended, September 30 2016 2015 Change ---------------------------------------------------------------------------- Components of debt and coverage ratios(1) ($ millions) ---------------------------------------------------------------------------- Net debt 12,217 11,713 504 EBITDA - excluding restructuring and other costs 4,668 4,438 230 Net interest cost 548 454 94 ---------------------------------------------------------------------------- Debt ratios ---------------------------------------------------------------------------- Fixed-rate debt as a proportion of total indebtedness (%) 95 92 3pts. Average term to maturity of long-term debt (excluding commercial paper) (years) 10.7 10.6 0.1 Net debt to EBITDA - excluding restructuring and other costs(1) (times) 2.62 2.64 (0.02) ---------------------------------------------------------------------------- Coverage ratios(1)(times) ---------------------------------------------------------------------------- Earnings coverage 4.6 5.1 (0.5) EBITDA - excluding restructuring and other costs interest coverage 8.5 9.8 (1.3) ---------------------------------------------------------------------------- Other measures(1)(%) ---------------------------------------------------------------------------- Dividend payout ratio of adjusted net earnings 77 69 8pts. Dividend payout ratio 76 69 7pts. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1. See Section 11.1 Non-GAAP and other financial measures. ----------------------------------------------------------------------------
Earnings coverage ratio measured for the 12-month period ended September 30, 2016, was 4.6 times, down from 5.1 times one year earlier. Higher borrowing costs reduced the ratio by 0.4, while lower income before borrowing costs and income taxes reduced the ratio by 0.1.
EBITDA - excluding restructuring and other costs interest coverage ratio measured for the 12-month period ended September 30, 2016, was 8.5 times, down from 9.8 times one year earlier as a result of the increase in net interest costs, partially offset by growth in EBITDA - excluding restructuring and other costs.
Dividend payout ratios: Actual dividend payout decisions will continue to be subject to our Board's assessment and the determination of our financial position and outlook, as well as our long-term dividend payout ratio guideline of 65 to 75% of prospective net earnings per share. The disclosed basic and adjusted dividend payout ratios are historical measures utilizing the last four quarters of dividends declared and earnings per share. We estimate that we are within our target guideline on a prospective dividend payout ratio basis. These historical measures for the 12-month period ended September 30, 2016 are presented for illustrative purposes in evaluating our target guideline and both exceeded the objective range.
7.6 Credit facilities
At September 30, 2016, we had available liquidity of more than $2.1 billion from unutilized credit facilities, including approximately $72 million available liquidity from the TI credit facility, and $133 million available from uncommitted letters of credit facilities, as well as $400 million available under our trade receivables securitization program (see Section 7.7 Sale of trade receivables). This adheres to our objective of generally maintaining at least $1.0 billion of available liquidity.
TELUS revolving credit facility
We have a $2.25 billion (or U.S. dollar equivalent) revolving credit facility with a syndicate of 15 financial institutions that was renewed in the second quarter of 2016 and expires on May 31, 2021. The revolving credit facility is used for general corporate purposes, including the backstop of commercial paper, as required.
TELUS revolving credit facility at September 30, 2016
----------------------------------------------------------------------------
Backstop
Outstanding for
undrawn commercial
letters of paper Available
($ millions) Expiry Size Drawn credit program liquidity
----------------------------------------------------------------------------
Five-year
revolving May 31,
facility(1) 2021 2,250 - - 137 2,113
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Canadian dollars or U.S. dollar equivalent.
----------------------------------------------------------------------------
Our revolving credit facility contains customary covenants, including a requirement that we not permit our consolidated leverage ratio to exceed 4.00 to 1.00 and that we not permit our consolidated coverage ratio to be less than 2.00 to 1.00, at the end of any financial quarter. Our consolidated leverage ratio was approximately 2.62 to 1.00 as at September 30, 2016, and our consolidated coverage ratio was approximately 8.52 to 1.00 as at September 30, 2016. These ratios are expected to remain well above the covenants. There are certain minor differences in the calculation of the leverage ratio and coverage ratio under the revolving credit facility, as compared with the calculation of Net debt to EBITDA - excluding restructuring and other costs and EBITDA - excluding restructuring and other costs interest coverage. Historically, the calculations have not been materially different. The covenants are not impacted by revaluation, if any, of Property, plant and equipment, Intangible assets or Goodwill for accounting purposes. Continued access to our credit facilities is not contingent on maintaining a specific credit rating.
Commercial paper
TELUS Corporation has an unsecured commercial paper program, which is backstopped by our revolving credit facility, enabling us to issue commercial paper up to a maximum aggregate amount of $1.4 billion at September 30, 2016, including a U.S. dollar denominated commercial paper program for up to U.S.$1.0 billion within this maximum aggregate amount. The commercial paper program is to be used for general corporate purposes, including, but not limited to, capital expenditures and investments. Our ability to reasonably access the commercial paper market in Canada and the U.S. is dependent on our credit ratings (see Section 7.8 Credit ratings).
TELUS International (Cda) Inc. credit facilities
As at September 30, 2016, TI had a U.S.$330 million bank credit facility, secured by its assets, expiring on May 31, 2021, with a syndicate of financial institutions. The credit facility comprises a revolving U.S.$115 million component and a U.S.$215 million term loan component. The credit facility is non-recourse to TELUS Corporation. As at September 30, 2016, $361 million ($352 million net of unamortized issue costs) was outstanding, all of which was denominated in U.S. dollars (U.S.$275 million), with a weighted average interest rate of 2.66%.
Other letter of credit facilities
At September 30, 2016, we had $208 million of letters of credit outstanding (December 31, 2015 - $202 million), issued under various uncommitted facilities; such letter of credit facilities are in addition to the ability to provide letters of credit pursuant to our committed bank credit facility. Available liquidity under various uncommitted letters of credit facilities was $133 million at September 30, 2016.
7.7 Sale of trade receivables
TELUS Communications Inc., a wholly owned subsidiary of TELUS, is a party to an agreement with an arm's-length securitization trust associated with a major Schedule I Canadian bank, under which it is able to sell an interest in certain trade receivables for an amount up to a maximum of $500 million. The agreement is in effect until December 31, 2018, and available liquidity was $400 million as at September 30, 2016. (See Note 19 of the interim consolidated financial statements.) Sales of trade receivables in securitization transactions are recognized as collateralized Short-term borrowings and thus do not result in our de-recognition of the trade receivables sold.
TELUS Communications Inc. is required to maintain at least a BB credit rating by DBRS Ltd. or the securitization trust may require the sale program to be wound down prior to the end of the term. The necessary credit rating was exceeded as of November 4, 2016.
7.8 Credit ratings
There were no changes to our investment grade credit ratings as of November 4, 2016.
7.9 Financial instruments, commitments and contingent liabilities
Financial instruments
Our financial instruments and the nature of certain risks that they may be subject to were described in Section 7.9 of our 2015 MD&A.
Liquidity risk
As a component of our capital structure financial policies, discussed in Section 4.3 Liquidity and capital resources, we manage liquidity risk and, therefore, our ability to meet current and future working capital requirements by: maintaining a daily cash pooling process that enables us to manage our available liquidity and our liquidity requirements according to our actual needs; maintaining bilateral bank facilities and a syndicated credit facility; maintaining an agreement to sell trade receivables to an arm's-length securitization trust; maintaining a commercial paper program; maintaining an in-effect shelf prospectus; continuously monitoring forecast and actual cash flows; and managing maturity profiles of financial assets and financial liabilities.
As of the date of this MD&A, we can offer up to $2.2 billion of long-term debt or equity securities pursuant to a shelf prospectus that is effective until April 2018.
At September 30, 2016, we had available liquidity of more than $1.2 billion from unutilized credit facilities and $133 million from uncommitted letters of credit facilities (see Section 7.6 Credit facilities), as well as $400 million available under our trade receivables securitization program (see Section 7.7 Sale of trade receivables). We also had $410 million in cash and temporary investments at September 30, 2016. This adheres to our objective of generally maintaining at least $1 billion of available liquidity. We believe that our investment grade credit ratings contribute to reasonable access to capital markets.
Currency risk
Our foreign exchange risk management includes the use of foreign currency forward contracts and currency options to fix the exchange rates on short-term U.S. dollar denominated transactions, commitments and commercial paper. We are also exposed to currency risks in that the fair value or future cash flows of our U.S. dollar notes could fluctuate because of changes in foreign exchange rates. A currency hedging relationship has been established for the related semi-annual interest payments and principal payment at maturity.
Commitments and contingent liabilities
Purchase obligations
As at September 30, 2016, our contractual commitments related to the acquisition of property, plant and equipment were $507 million through to December 31, 2018, as compared to $326 million over a period ending December 31, 2017, reported in our 2015 annual report, primarily driven by the increase in commitments related to broadband expansion.
Indemnification obligations
At September 30, 2016, we had no liability recorded in respect of indemnification obligations.
Claims and lawsuits
A number of claims and lawsuits (including class actions and intellectual property infringement claims) seeking damages and other relief are pending against us and, in some cases, numerous other wireless carriers and telecommunications service providers. As well, we have received notice of, or are aware of, certain possible claims (including intellectual property infringement claims) against us.
It is not currently possible for us to predict the outcome of such claims, possible claims and lawsuits due to various factors, including: the preliminary nature of some claims; uncertain damage theories and demands; an incomplete factual record; uncertainty concerning legal theories, procedures and their resolution by the courts, at both the trial and the appeal levels; and the unpredictable nature of opposing parties and their demands. However, when it is determined in respect of a particular claim that payments to claimants are probable, we accrue an estimate of the liability.
However, subject to the foregoing limitations, management is of the opinion, based upon legal assessments and information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would have a material effect on our financial position and the results of our operations, including cash flows, with the exception of the items disclosed in Note 23(a) of the interim consolidated financial statements.
7.10 Outstanding share information
Outstanding shares (millions) September 30, 2016 October 31, 2016 ---------------------------------------------------------------------------- Common Shares 591 591 Common Share options - all exercisable 2 1 ----------------------------------------------------------------------------
7.11 Transactions between related parties
Investments in significant controlled entities
As at September 30, 2016, TELUS Corporation controlled 100% of the equity of TELUS Communications Inc., which, in turn, ultimately controlled 100% of the equity of TELUS Communications Company and TELE-MOBILE COMPANY. This is unchanged from December 31, 2015.
Transactions with key management personnel
Our key management personnel have authority and responsibility for overseeing, planning, directing and controlling our activities. They consist of our Board of Directors and our Executive Leadership Team. Total compensation expense amounts for key management personnel were $15 million and $40 million, respectively, in the third quarter and first nine months of 2016, as compared to $32 million and $56 million, respectively, in the comparable periods of 2015. See Note 24(a) of the interim consolidated financial statements for additional detail.
Transactions with defined benefit pension plans
We provided management and administrative services to our defined benefit pension plans. Charges for these services were on a cost recovery basis and were immaterial.
Transactions with real estate joint ventures
In the first nine months of 2016, we had transactions with real estate joint ventures, which are related parties to us, as set out in Note 18 of our interim consolidated financial statements. In regard to the TELUS Garden real estate joint venture, commitments and contingent liabilities include construction-related contractual commitments through to 2017 (approximately $9 million at September 30, 2016). The TELUS Garden real estate joint venture had a credit agreement with two Canadian financial institutions (as 50% lender) and TELUS Corporation (as 50% lender) to provide $136 million of construction financing for the residential project as at December 31, 2015; as at September 30, 2016, all outstanding amounts had been repaid. As at September 30, 2016, the proportion of space leased in the TELUS Garden office tower was approximately 98%. The sale of the TELUS Garden residential condominium units continued in the third quarter of 2016 and the sale of the remaining residential condominium units are expected to be substantially completed by the end of 2016.
For the TELUS Sky" real estate joint venture, commitments and contingent liabilities include construction-related contractual commitments through to 2018 (approximately $136 million at September 30, 2016) and construction credit facilities ($342 million with three Canadian financial institutions as 66 2/3% lender and TELUS as 33 1/3% lender).
8. Accounting matters
8.1 Critical accounting estimates
Our significant accounting policies are described in Note 1 of the Consolidated financial statements dated December 31, 2015. Our critical accounting estimates and significant judgments are described in Section 8.1 of our 2015 annual MD&A, which is hereby incorporated by reference. The preparation of financial statements in conformity with IFRS requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting estimates and significant judgments are generally discussed with the Audit Committee each quarter.
8.2 Accounting policy developments
Our accounting policy developments were discussed in Section 8.2 Accounting policy developments of our 2015 annual MD&A, and updated in Section 8.2 of our 2016 Q1 MD&A, and are hereby incorporated by reference. See Note 2 of the interim consolidated financial statements for additional details.
9. Update to assumptions
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this MD&A.
The assumptions for our 2016 outlook were described in Section 9 General trends, outlook and assumptions of our 2015 annual MD&A. Assumptions were updated in Section 9 Update to assumptions of our 2016 Q1 MD&A and 2016 Q2 MD&A. These documents are hereby incorporated by reference. Such assumptions remain the same, except as updated below.
-- We now estimate that economic growth in Canada will be slightly slower
at approximately 1.2% in 2016 (previously 1.3%), based on a composite of
estimates from Canadian banks and other sources. For our incumbent local
exchange carrier (ILEC) provinces in Western Canada, we now estimate
that economic growth in British Columbia will be approximately 2.8% in
2016 (previously 2.9%), and that economic contraction in Alberta will
now be approximately (2.2)% in 2016 (previously (2.0)%).
10. Risks and risk management
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of this MD&A. Our principal risks and uncertainties that could affect our future business results and our associated risk mitigation activities were described in our 2015 annual MD&A, and updated in our 2016 Q1 MD&A and 2016 Q2 MD&A, each of which is hereby incorporated by reference. Certain additional updates follow.
10.1 Regulatory matters
Our telecommunications, broadcasting and radiocommunication services are regulated under federal laws by various authorities including the Canadian Radio-television and Telecommunications Commission (CRTC), the Minister of Innovation, Science and Economic Development Canada (ISED) and the Minister of Canadian Heritage. These laws and accompanying regulations relate to, among other matters, rates, terms and conditions for the provision of telecommunications services, licensing of broadcast services, licensing of spectrum and radio apparatus, and restrictions on ownership and control by non-Canadians. The outcome of regulatory proceedings, reviews, appeals, policy announcements, court cases and other developments could have a material impact on our operating procedures and profitability.
Regulatory and federal government reviews
The CRTC has recently initiated public proceedings to review, among other issues, differential pricing practices related to Internet data plans that could affect TELUS' business results. The CRTC is also conducting further followup related to past proceedings on wireline wholesale services (including the appropriateness of mandating competitor access to our fibre-to-the-premises (FTTP) facilities) and wireless wholesale services that could also impact TELUS. The CRTC's decision to require pro-rated refunds, the recently concluded basic telecommunications services proceeding and the CRTC's future review of TELUS' broadcasting licences are also reviewed below, as is the federal government's ongoing cultural policy review.
Review of wireless code
On July 28, 2016, the CRTC launched a proceeding to review the Wireless Code which was originally launched in 2013. This proceeding was planned because the CRTC had indicated that it would review the Wireless Code three years after it was put into force. The Commission has asked parties to comment on the effectiveness of the Wireless Code and whether any provisions should be updated. There is a hearing scheduled for this proceeding in February 2017. TELUS has filed its intervention in this proceeding, asking for, among other things, changes to allow for more flexibility in how early cancellation fees are calculated, to allow for more offers to be made to customers, to clarify how data caps are to be managed and to make the default version of the permanent copy of a contract to be electronic. These are amendments that will increase customer choice and are consistent with customer preferences. The decision in this proceeding is not expected to have a material impact on TELUS.
Examination of differential pricing practices related to Internet data plans
On May 18, 2016, the CRTC issued Examination of differential pricing practices related to Internet data plans, Telecom Notice of Consultation CRTC 2016-192 in which it announced its intention to examine differential pricing practices for Internet data plans, following a complaint concerning Videotron's pricing practices when offering its unlimited music service to its mobile wireless customers. In general terms, differential pricing occurs when the same or a similar product or service is sold to customers at different prices. Differential pricing is a normal feature of competitive markets, including telecommunications markets. Examples of differential pricing practices include zero-rating (when an Internet service provider (ISP) exempts data traffic from a particular application or a set of applications from a monthly data plan, which is often sold to consumers at a fixed monthly price) and sponsored data (where companies sponsor the data usage for specific content allowing an ISP's customers to access this content with no impact to monthly data plan allowances). The CRTC's stated objective in this proceeding is to develop an overall approach to differential pricing for Internet data plans, as opposed to adjudicating complaints on a case-by-case basis. A public hearing commenced on October 31, 2016. The decision in this proceeding is not expected to have a material impact on TELUS.
CRTC decision to require pro-rated refunds
On May 5, 2016, the CRTC issued TELUS Communications Company - Prohibition of 30-day cancellation policies - Application regarding liquidated damages, Telecom Decision CRTC 2016-170, in which the CRTC, among other things, mandated that all service providers are to provide pro-rated refunds to customers who cancel telecommunications and broadcasting services. This decision was unexpected in that it is contradicted by guidance that TELUS and third parties had received from CRTC staff following a 2014 CRTC decision regarding prohibition of notice period for cancellation of services and in light of past decisions on the Wireless Code and notice of cancellation policies which had not required pro-rated refunds. The decision has major impacts on billing systems with no transition period provided to implement the required changes. On July 4, 2016, TELUS filed an application with the CRTC seeking guidance and clarification that the decision does not apply with respect to wireless services with a subsidized device, usage-based services and local telephone service in non-forborne exchanges. TELUS also requested an extension of time to implement the decision. The CRTC has yet to issue a decision on this matter. Pending resolution of TELUS' application, the potential impact of this decision is not expected to be material.
Wireless wholesale services review
On May 5, 2015, the CRTC issued its decision at the conclusion of its wireless wholesale services review. The main determination was that the CRTC will regulate the wholesale GSM-based domestic roaming rates that TELUS, Rogers and Bell charge other wireless carriers. Proposed final tariff rates were filed by TELUS, Rogers and Bell on November 23, 2015, based on the CRTC's Phase II costing approach. The CRTC is in the process of reviewing these tariff filings, with the announcement of the final rates expected in the first half of 2017. While TELUS does not currently expect that the decision will have a negative material impact, the impact will be assessed once the final wholesale roaming rates have been approved.
Basic telecommunications services
On April 9, 2015, the CRTC issued Review of basic telecommunications services, Telecom Notice of Consultation CRTC 2015-134, announcing a two-phase proceeding to determine what telecommunications services (e.g. voice and broadband) are required by all Canadians in order to participate in the digital economy. In the first phase of the review, the CRTC gathered information to better understand which telecommunications services are being offered across Canada and whether any areas are underserved or unserved. In the second phase of the review, the CRTC conducted consultations to collect comments from Canadians regarding the issues identified. Following the second phase, a public hearing was held in April 2016. Among other things, the CRTC reviewed whether broadband Internet service should be a basic telecommunications service and whether there should be changes to the National Contribution Fund from which subsidies are provided for voice service in high-cost serving areas (and video relay service). While supportive of the inclusion of broadband service as a part of basic telecommunications service at a 5 Mbps download and 1 Mbps upload speed, TELUS opposed any new regulatory requirements pertaining to the provision or mandating of new minimum data allowances and quality of service indicators for retail broadband service, and any new subsidies for broadband from the National Contribution Fund. We expect the CRTC to issue a decision as a result of this proceeding by the end of the fourth quarter of 2016. It is too early to determine what impact the outcome of this proceeding will have on TELUS.
Wireline wholesale services review
On July 22, 2015, the CRTC released Review of wholesale wireline services and associated policies, Telecom Regulatory Policy CRTC 2015-326. This decision updates the CRTC's framework for the provision of regulated wireline wholesale services and will remain in place for a minimum of five years. The decision substantially preserves the status quo established in the CRTC's 2008 wireline wholesale services framework, with two key exceptions. First, the CRTC has ordered the introduction of a disaggregated wholesale high-speed Internet access service for ISP competitors. This will include access to FTTP facilities. This requirement is being phased in geographically beginning in the largest markets in Ontario and Quebec (i.e., in the serving territories of Bell Aliant, Bell Canada, Cogeco, Rogers and Videotron). The Commission initiated a followup proceeding to determine the technical configurations, appropriate costs and wholesale cost-based rates in those regions. Second, the Commission determined that the provision of access to unbundled local loops to competitors will no longer be mandated and will be phased out over a three-year transition period. Unbundled local loops are the copper lines connecting homes and businesses to the central offices in TELUS' network. Competitors use these lines to provide voice services or low-speed Internet services to their retail customers.
The FTTP follow-up activities directed in Telecom Policy CRTC 2015-326 remain ongoing. In Follow-up to Telecom Regulatory Policy 2015-326 - Implementation of a disaggregated wholesale high-speed access service, including over fibre-to-the premises access facilities, Telecom Decision CRTC 2016-379, the Commission rendered its decision on the first phase of the follow-up process for the disaggregated FTTP wholesale services for Bell, Rogers, Videotron and Cogeco by ruling on the technical configurations for their respective services. The associated tariff and cost study reviews have now begun, for these companies who will be filing their proposed cost studies and tariffs in the fourth quarter of 2016. For the second phase, which involves FTTP wholesale services for the rest of Canada (including TELUS' serving territories), a technical configuration proceeding is expected to commence in the fourth quarter of 2016. The associated cost study and tariff review will follow, which is expected to take place during the second quarter of 2017.
TELUS anticipates no material adverse impact in the short term from the CRTC's decision. Given the phased implementation of the mandated wholesale provision of access to our FTTP networks, it is too early to determine the ultimate impact this decision will have on TELUS in the longer term. The determination that the provision of access to unbundled local loops to competitors will no longer be mandated and will be phased out over a three-year transition period is not expected to have a material impact on TELUS.
Disconnection practices between telecommunications service providers
On August 18, 2016, the CRTC issued Call for comments: Disconnection practices between telecommunications service providers, Telecom Notice of Consultation CRTC 2016-333 in which it sought industry comments with respect to the practices associated with the disconnection of one telecommunication service provider by another telecommunications service provider, and specifically whether any regulatory measures should be introduced, including mandatory notification requirements. A decision is expected by the first quarter of 2017 and is not expected to have a material adverse impact on TELUS.
TELUS broadcasting licence renewals
TELUS' national licence to operate a video-on-demand undertaking was granted an administrative renewal, which extends the licence term to August 31, 2017 (Broadcasting Decision CRTC 2016-7 issued on January 12, 2016). This licence-term extension enables the CRTC to conduct a consultation on the standard conditions of licence of all video-on-demand licences (Broadcasting Notice of Consultation CRTC 2016-195 issued on May 20, 2016). Also, TELUS' regional licences to operate broadcasting distribution undertakings in Alberta and British Columbia were granted an administrative renewal, which extends the licence term to August 31, 2017. TELUS' regional broadcasting distribution licence to serve Quebec expires in 2018.
In consultations launched in Broadcasting Notice of Consultation CRTC 2016-147 and Broadcasting Notice of Consultation CRTC 2016-225 issued on April 21, 2016 and June 21, 2016, respectively, the CRTC is considering the renewal of broadcasting licences held by the large television ownership groups and large broadcasting distribution undertakings. TELUS' broadcasting distribution undertaking licences to serve British Columbia and Alberta are being reviewed as part of these consultations. It is expected that the CRTC will use these licence renewal consultations to further entrench the consumer-friendly policies announced in its Let's Talk TV decisions issued in March 2015.
Review of Canada's cultural policies
On April 22, 2016, the Minister of Canadian Heritage announced a broad review of Canada's cultural policies that is intended to strengthen the "creation, discovery and export of Canadian content in a digital world." Amendments to the Broadcasting Act, Telecommunications Act and Copyright Act, changes to the mandates of institutions and agencies, such as the CRTC and the CBC, and the potential introduction of new laws and establishment of new agencies are being included for consideration by the Minister.
The first phase of the public consultation was a pre-consultation by way of an online poll, which closed May 20, 2016. A panel of experts has been appointed to act as a "sounding board" to the Minister. A Consultation Paper was released on September 15, 2016 in which the federal government sets out its intention to adapt its approach on how to support culture and move Canada forward as a hub for creativity and innovation. The Minister has announced that she will host round table discussions with stakeholders across the country over the next few months and Canadians are also invited to share their views via social media. It is unknown at this time whether there will be a material impact resulting from this Consultation.
Government of Quebec Bill C-74 - Blocking of certain websites associated with online gambling
Bill 74 was adopted on May 17, 2016, and assented to on May 18, 2016, by the National Assembly of Quebec. The provisions of this legislation, which will allow the Government of Quebec to require ISPs and wireless service providers operating in Quebec to block access to a prescribed list of gambling websites, are not yet in force (anticipated to occur in 2018). On July 8, 2016, the Public Interest Advocacy Centre (PIAC) filed an application with the CRTC seeking a declaration that: Bill 74 is unconstitutional; a declaration that any application by a carrier, to the CRTC, for website blocking pursuant to this legislation will be denied; and an interim injunction enjoining ISPs and wireless service providers operating in Quebec from actually blocking websites or taking steps preparatory to the implementation of Bill 74. It is too early to determine what impact this legislation may have on TELUS. In July 2016, the Canadian Wireless Telecommunications Association filed a constitutional challenge to Bill 74 in Quebec Superior Court. On September 1, 2016, the CRTC issued a letter asking for comments on its preliminary view that the PIAC application should be suspended pending the disposition of the constitutional challenge before the Quebec Superior Court. On September 16, 2016, TELUS filed a letter where it supported the position that the PIAC application before the CRTC should be suspended. The constitutional challenge to Bill C74 is now scheduled to be heard in the Quebec Superior Court in April 2017.
Review of tariffs for aggregated wholesale high-speed access services
The CRTC is conducting a review of cost studies and rates associated with aggregated wholesale high-speed access services, which are services provided by incumbent local exchange carriers (ILECs) and cable companies on their respective DSL and cable facilities to ISPs to resell high-speed Internet services. In March 2016, the CRTC ordered all rates for aggregated wholesale high-speed access services to be interim rates and asked ILECs and cable companies to file cost studies and proposed rates for these services. While this review remains ongoing, on October 6, 2016, the Commission issued Tariff notice applications concerning aggregated wholesale high-speed access services - Revised interim rates, Telecom Order 2016-396, where it reduced many of the interim rates for ILECs and cable companies, including TELUS. The Commission ordered the reduction for TELUS because it found that TELUS had filed insufficient evidence to support its cost studies. This review remains ongoing, and TELUS will have an opportunity to file further evidence to substantiate its costs and proposed rates. It is not expected that the outcome of this review will have a material impact on TELUS.
Risk mitigation
: TELUS participates in various CRTC proceedings and has advocated the following positions in its participation:
-- Amendments under the Wireless Code to benefit customer choice and
customer preferences.
-- That differential pricing of Internet data plans is generally pro-
competitive, pro-consumer and a normal feature of competitive markets,
including telecommunications markets, while differential pricing by
vertically integrated communications companies for their affiliated
broadcasting services might raise concerns that can be dealt with by the
CRTC pursuant to its powers under the Broadcasting Act.
-- The basic telecommunications services review, opposing any new industry-
funded subsidies for broadband or other services.
-- The follow-up proceedings for the implementation of the new
disaggregated wholesale high-speed Internet access service for ISP
competitors in Ontario and Quebec (including issues related to service
configuration) in order to influence the implementation of the service
in our serving territories, when the service is phased-in.
-- The disconnection practices proceeding supporting a notification period
of thirty days prior to disconnection which TELUS already provides, and
to advocate for no further intervention by the CRTC.
-- Filing applications for broadcasting distribution licences to serve
markets in British Columbia and Alberta and also intervening in the
proceeding to consider the licence renewals of the vertically integrated
broadcasting service providers.
-- Ensuring favourable changes in the broadcasting system.
-- Supporting the CRTC's preliminary view that it should suspend
consideration of an application filed by the Public Interest Advocacy
Centre seeking a declaration that the Government of Quebec's Bill C-74
(as described above) is unconstitutional pending the disposition of the
constitutional challenge of Bill C-74 before the Quebec Superior Court
Blocking of certain websites associated with online gambling.
-- Filing further supporting evidence with the CRTC's Review of tariffs for
aggregated wholesale high-speed access services to substantiate TELUS's
cost and proposed rates for its wholesale aggregated high-speed access
services.
11. Definitions and reconciliations
11.1 Non-GAAP and other financial measures
We have issued guidance on and report certain non-GAAP measures that are used to evaluate the performance of TELUS and its segments, as well as to determine compliance with debt covenants and to manage our capital structure. As non-GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined, qualified and reconciled with their nearest GAAP measure.
Adjusted net income and adjusted basic earnings per share: These measures are used to evaluate performance at a consolidated level and exclude items that may distort the underlying trends in business performance. These measures should not be considered alternatives to net income or basic earnings per share in measuring TELUS' performance. Items that may, in management's view, obscure the underlying trends in business performance include significant gains or losses associated with real estate development partnerships, restructuring and other costs, long-term debt prepayment premiums (when applicable), income-tax related adjustments and asset retirements related to restructuring activities. (See Analysis of net income and Analysis of basic EPS in Section 1.3.)
Capital intensity: This measure is calculated as capital expenditures (excluding spectrum licences) divided by total operating revenues. This measure provides a basis for comparing the level of capital expenditures to those of other companies of varying size within the same industry.
Dividend payout ratio: This ratio is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the financial statements, divided by the sum of basic earnings per share for the most recent four quarters for interim reporting periods. For fiscal years, the denominator is annual basic earnings per share. Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of net earnings per share on a prospective basis. (See Section 7.5 Liquidity and capital resource measures.)
Calculation of Dividend payout ratio ---------------------------------------------------------------------------- Twelve-month periods ended September 30 ($) 2016 2015 ---------------------------------------------------------------------------- Numerator - Sum of the last four quarterly dividends declared per Common Share 1.80 1.64 Denominator - Basic earnings per share 2.37 2.36 ---------------------------------------------------------------------------- Ratio (%) 76 69 ----------------------------------------------------------------------------
Dividend payout ratio of adjusted net earnings: This ratio is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the financial statements, divided by adjusted net earnings per share. Adjusted net earnings per share is basic earnings per share, as used in the Dividend payout ratio, adjusted to exclude the gain on the exchange of wireless spectrum licences, net gains and equity income from real estate joint venture developments, business acquisition-related provisions, transformative compensation adjustments, long-term debt prepayment premium (when applicable) and income tax-related adjustments.
Calculation of Dividend payout ratio of adjusted net earnings
----------------------------------------------------------------------------
Twelve-month periods ended September 30 ($) 2016 2015
----------------------------------------------------------------------------
Numerator - Sum of the last four quarterly dividends
declared per Common Share 1.80 1.64
----------------------------------------------------------------------------
Adjusted net earnings ($ millions):
Net income attributable to Common Shares 1,403 1,433
Deduct gain on the exchange of wireless spectrum
licences, after income taxes (13) -
Deduct net gains and equity income from real estate
joint venture developments, after income taxes (11) -
Add back business acquisition-related provisions,
after income taxes 10 -
Add back net unfavourable (deduct net favourable)
income tax-related adjustments (11) 6
----------------------------------------------------------------------------
1,378 1,439
----------------------------------------------------------------------------
Denominator - Adjusted net earnings per share 2.33 2.37
----------------------------------------------------------------------------
Adjusted ratio (%) 77 69
----------------------------------------------------------------------------
Earnings coverage: This measure is defined in the Canadian Securities Administrators' National Instrument 41-101 and related instruments, and is calculated as follows:
Calculation of Earnings coverage ---------------------------------------------------------------------------- Twelve-month periods ended September 30 ($ millions, except ratio) 2016 2015 ---------------------------------------------------------------------------- Net income attributable to Common Shares 1,403 1,433 Income taxes (attributable to Common Shares) 493 545 Borrowing costs (attributable to Common Shares) (1) 532 488 ---------------------------------------------------------------------------- Numerator 2,428 2,466 Denominator - Borrowing costs (from above) 532 488 ---------------------------------------------------------------------------- Ratio (times) 4.6 5.1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1. Interest on Long-term debt plus Interest on short-term borrowings and other plus long-term debt prepayment premium, adding back capitalized interest and deducting borrowing costs attributable to non-controlling interests. ----------------------------------------------------------------------------
EBITDA (earnings before interest, income taxes, depreciation and amortization): We report EBITDA because it is a key measure used to evaluate performance at a consolidated level and the contribution of our two segments. EBITDA is commonly reported and widely used by investors and lending institutions as an indicator of a company's operating performance and ability to incur and service debt, and as a valuation metric. EBITDA should not be considered an alternative to Net income in measuring TELUS' performance, nor should it be used as an exclusive measure of cash flow. EBITDA as calculated by TELUS is equivalent to Operating revenues less the total of Goods and services purchased expense and Employee benefits expense.
We calculate EBITDA - excluding restructuring and other costs, as it is a component of the EBITDA - excluding restructuring and other costs interest coverage ratio and the Net debt to EBITDA - excluding restructuring and other costs ratio.
We may also calculate an adjusted EBITDA to exclude items of an unusual nature that do not reflect our ongoing operations and should not, in our opinion, be considered in a valuation metric or that should not be included in an assessment of our ability to service or incur debt.
EBITDA reconciliation
----------------------------------------------------------------------------
Third quarters ended Nine-month periods
September 30 ended September 30
------------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
Net income 355 365 1,149 1,121
Financing costs 129 106 386 333
Income taxes 132 126 411 439
Depreciation 388 361 1,158 1,069
Amortization of intangible assets 127 110 356 322
----------------------------------------------------------------------------
EBITDA 1,131 1,068 3,460 3,284
Add back restructuring and other
costs 60 51 131 127
----------------------------------------------------------------------------
EBITDA - excluding restructuring
and other costs 1,191 1,119 3,591 3,411
Deduct gain on the exchange of
wireless spectrum licences - - (15) -
Deduct net gains and equity income
from real estate joint venture
developments (10) - (19) -
----------------------------------------------------------------------------
Adjusted EBITDA 1,181 1,119 3,557 3,411
----------------------------------------------------------------------------
EBITDA - excluding restructuring and other costs interest coverage: This measure is defined as EBITDA -excluding restructuring and other costs, divided by Net interest cost, calculated on a 12-month trailing basis. This measure is similar to the coverage ratio covenant in our credit facilities, as described in Section 7.6 Credit facilities.
Free cash flow: We report this measure as a supplementary indicator of our operating performance. It should not be considered an alternative to the measures in the condensed interim consolidated statements of cash flows. Free cash flow excludes certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets and other sources and uses of cash, as found in the condensed interim consolidated statements of cash flows. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities.
Free cash flow calculation
----------------------------------------------------------------------------
Third quarters ended Nine-month periods
September 30 ended September 30
--------------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
EBITDA 1,131 1,068 3,460 3,284
Deduct gain on the exchange of
wireless spectrum licences - - (15) -
Deduct net gains and equity
income from real estate joint
venture developments (10) - (19) -
Gains from the sale of property,
plant and equipment (4) - (15) -
Restructuring costs net of
disbursements 12 6 (27) 41
Items from the interim
consolidated statements of cash
flows:
Share-based compensation
expense, net 27 38 65 40
Net employee defined benefit
plans expense 23 27 67 81
Employer contributions to
employee defined benefit
plans (14) (20) (53) (68)
Interest paid (132) (115) (387) (329)
Interest received - - 1 3
Capital expenditures (excluding
spectrum licences) (787) (623) (2,174) (1,922)
----------------------------------------------------------------------------
Free cash flow before income
taxes 246 381 903 1,130
Income taxes paid, net of
refunds (148) (71) (571) (249)
----------------------------------------------------------------------------
Free cash flow 98 310 332 881
----------------------------------------------------------------------------
The following reconciles our definition of free cash flow with Cash provided by operating activities.
Free cash flow reconciliation with Cash provided by operating activities
----------------------------------------------------------------------------
Third quarters ended Nine-month periods
September 30 ended September 30
------------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
Free cash flow 98 310 332 881
Add (deduct):
Capital expenditures (excluding
spectrum licences) 787 623 2,174 1,922
Adjustments to reconcile to Cash
provided by operating activities 147 92 (19) (117)
----------------------------------------------------------------------------
Cash provided by operating
activities 1,032 1,025 2,487 2,686
----------------------------------------------------------------------------
Net debt: We believe that net debt is a useful measure because it represents the amount of Short-term borrowings and long-term debt obligations that are not covered by available Cash and temporary investments. The nearest IFRS measure to net debt is Long-term debt, including Current maturities of long-term debt. Net debt is a component of the Net debt to EBITDA - excluding restructuring and other costs ratio.
Calculation of Net debt ---------------------------------------------------------------------------- At September 30 ($ millions) 2016 2015 ---------------------------------------------------------------------------- Long-term debt including current maturities 12,454 11,712 Debt issuance costs netted against long-term debt 67 48 Derivative liabilities (assets), net 24 (7) Accumulated other comprehensive income amounts arising from financial instruments used to manage interest rate and currency risks associated with U.S. dollar denominated long-term debt (excluding tax effects) (18) - Cash and temporary investments (410) (141) Short-term borrowings 100 101 ---------------------------------------------------------------------------- Net debt 12,217 11,713 ----------------------------------------------------------------------------
Net debt to EBITDA - excluding restructuring and other costs: This measure is defined as net debt at the end of the period divided by 12-month trailing EBITDA - excluding restructuring and other costs. Our long-term policy guideline for this ratio is from 2.00 to 2.50 times. (See discussion in Section 7.5 Liquidity and capital resource measures.) This measure is similar to the leverage ratio covenant in our credit facilities, as described in Section 7.6 Credit facilities.
Net interest cost: This measure is the denominator in the calculation of EBITDA - excluding restructuring and other costs interest coverage. Net interest cost is defined as financing costs, excluding capitalized long-term debt interest, employee defined benefit plans net interest and recoveries on redemption and repayment of debt, calculated on a 12-month trailing basis. No recoveries on redemption and repayment of debt were recorded in 2016 and 2015. Expenses recorded for the long-term debt prepayment premium, if any, are included in net interest cost. Net interest cost was $548 million in the 12-month period ended September 30, 2016, and $454 million in the 12-month period ended September 30, 2015.
Restructuring and other costs: With the objective of reducing ongoing costs, we incur associated incremental, non-recurring restructuring costs. We may also incur atypical charges when undertaking major or transformational changes to our business or operating models. We include incremental external costs incurred in connection with business acquisition or disposition activity, as well as litigation costs, in the context of significant losses and settlements, in other costs.
Subsequent to September 30, 2016, we made commitments to pay, in the fourth quarter of 2016, lump-sum amounts totaling approximately $300 million (inclusive of amounts proposed in an unratified tentative agreement), in respect of immediately-vesting, transformative compensation expense to the majority of our existing unionized and non-unionized Canadian-sited workforces; a portion of the net-of-tax amount for certain lump-sum recipients will be paid in Common Shares purchased in the market. (See Note 23(b) of the interim consolidated financial statements.)
Restructuring and other costs composition
----------------------------------------------------------------------------
Third quarters ended Nine-month periods
September 30 ended September 30
----------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
Goods and services purchased 23 17 39 59
Employee benefits expense 37 34 92 68
----------------------------------------------------------------------------
Restructuring and other costs
included in EBITDA 60 51 131 127
----------------------------------------------------------------------------
11.2 Operating indicators
The following measures are industry metrics that are useful in assessing the operating performance of a wireless and wireline telecommunications entity, but do not have a standardized meaning under IFRS.
Average revenue per subscriber unit per month (ARPU) for wireless subscribers is calculated as network revenue divided by the average number of subscriber units on the network during the period and is expressed as a rate per month.
Churn per month is calculated as the number of subscriber units deactivated during a given period divided by the average number of subscriber units on the network during the period and is expressed as a rate per month. A TELUS, Koodo or Public Mobile brand prepaid subscriber is deactivated when the subscriber has no usage for 90 days following expiry of the prepaid credits.
Cost of acquisition (COA) consists of the total of the device subsidy (the device cost to TELUS less the initial charge to the customer), commissions, and advertising and promotion expenses related to the initial subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as the cost of acquisition divided by the gross subscriber activations during the period.
Retention spend to network revenue represents direct costs associated with marketing and promotional efforts (including device subsidies and commissions) aimed at the retention of the existing subscriber base, divided by network revenue.
Retention volume represents the number of subscriber units retained in the period through marketing and promotional efforts that result in client upgrades or contract renewals.
Wireless subscriber unit (subscriber) is defined as an active recurring mobile revenue-generating unit (e.g. mobile phone, tablet or mobile Internet key) with a unique subscriber identifier (SIM or IMEI number). In addition, TELUS has a direct billing or support relationship with the user of each device. Subscriber units exclude machine-to-machine (M2M) devices (a subset of the Internet of Things), such as those used for asset tracking, remote control monitoring and meter readings, vending machines and wireless automated teller machines.
Wireline subscriber connection is defined as an active recurring revenue-generating unit that has access to stand-alone services, including Internet access, TELUS TV and residential network access lines (NALs). In addition, TELUS has a direct billing or support relationship with the user of each service. Reported subscriber units exclude business NALs as the impact of migrating from voice lines to IP services has led to business NAL losses without a similar decline in revenue, thus diminishing its relevance as a key performance indicator.
Condensed interim consolidated statements of income and other comprehensive income (unaudited)
Three months Nine months
Periods ended September 30 (millions
except per share amounts) 2016 2015 2016 2015
----------------------------------------------------------------------------
OPERATING REVENUES
Service $ 3,045 $ 2,934 $ 8,921 $ 8,647
Equipment 180 207 516 597
----------------------------------------------------------------------------
Revenues arising from contracts with
customers 3,225 3,141 9,437 9,244
Other operating income 13 14 57 41
----------------------------------------------------------------------------
3,238 3,155 9,494 9,285
----------------------------------------------------------------------------
OPERATING EXPENSES
Goods and services purchased 1,426 1,394 4,057 4,050
Employee benefits expense 681 693 1,977 1,951
Depreciation 388 361 1,158 1,069
Amortization of intangible assets 127 110 356 322
----------------------------------------------------------------------------
2,622 2,558 7,548 7,392
----------------------------------------------------------------------------
OPERATING INCOME 616 597 1,946 1,893
Financing costs 129 106 386 333
----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 487 491 1,560 1,560
Income taxes 132 126 411 439
----------------------------------------------------------------------------
NET INCOME 355 365 1,149 1,121
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Items that may subsequently be
reclassified to income
Change in unrealized fair value of
derivatives designated as cash flow
hedges (4) 1 (13) (1)
Foreign currency translation
adjustment arising from translating
financial statements of foreign
operations 2 12 4 17
Change in unrealized fair value of
available-for-sale financial assets 2 1 (1) (2)
----------------------------------------------------------------------------
- 14 (10) 14
----------------------------------------------------------------------------
Item never subsequently reclassified
to income
Employee defined benefit plan re-
measurements 150 (156) 167 (41)
----------------------------------------------------------------------------
150 (142) 157 (27)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 505 $ 223 $ 1,306 $ 1,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET INCOME ATTRIBUTABLE TO:
Common Shares $ 348 $ 365 $ 1,142 $ 1,121
Non-controlling interest 7 - 7 -
----------------------------------------------------------------------------
$ 355 $ 365 $ 1,149 $ 1,121
----------------------------------------------------------------------------
----------------------------------------------------------------------------
COMPREHENSIVE INCOME ATTRIBUTABLE TO:
Common Shares $ 501 $ 223 $ 1,298 $ 1,094
Non-controlling interest 4 - 8 -
----------------------------------------------------------------------------
$ 505 $ 223 $ 1,306 $ 1,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 0.59 $ 0.61 $ 1.93 $ 1.85
Diluted $ 0.59 $ 0.61 $ 1.93 $ 1.85
TOTAL WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 592 601 593 605
Diluted 592 603 593 606
Condensed interim consolidated statements of financial position (unaudited)
As at (millions) September 30, December 31,
2016 2015
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and temporary investments, net $ 410 $ 223
Accounts receivable 1,422 1,428
Income and other taxes receivable 85 1
Inventories 262 360
Prepaid expenses 307 213
Real estate joint venture advances - 66
Current derivative assets 11 40
----------------------------------------------------------------------------
2,497 2,331
----------------------------------------------------------------------------
Non-current assets
Property, plant and equipment, net 10,297 9,736
Intangible assets, net 10,292 9,985
Goodwill, net 3,776 3,761
Other long-term assets 830 593
----------------------------------------------------------------------------
25,195 24,075
----------------------------------------------------------------------------
$ 27,692 $ 26,406
----------------------------------------------------------------------------
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Short-term borrowings $ 100 $ 100
Accounts payable and accrued liabilities 2,181 1,990
Income and other taxes payable 37 108
Dividends payable 272 263
Advance billings and customer deposits 747 760
Provisions 170 197
Current maturities of long-term debt 850 856
Current derivative liabilities 12 2
----------------------------------------------------------------------------
4,369 4,276
----------------------------------------------------------------------------
Non-current liabilities
Provisions 432 433
Long-term debt 11,604 11,182
Other long-term liabilities 731 688
Deferred income taxes 2,263 2,155
----------------------------------------------------------------------------
15,030 14,458
----------------------------------------------------------------------------
Liabilities 19,399 18,734
----------------------------------------------------------------------------
Owners' equity
Common equity 8,281 7,672
Non-controlling interest 12 -
----------------------------------------------------------------------------
8,293 7,672
----------------------------------------------------------------------------
$ 27,692 $ 26,406
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed interim consolidated statements of cash flows (unaudited)
Three months Nine months
Periods ended September 30 (millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 355 $ 365 $ 1,149 $ 1,121
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization 515 471 1,514 1,391
Deferred income taxes 47 31 48 77
Share-based compensation expense,
net 27 38 65 40
Net employee defined benefit plans
expense 23 27 67 81
Employer contributions to employee
defined benefit plans (14) (20) (53) (68)
Other 8 22 (5) 36
Net change in non-cash operating
working capital 71 91 (298) 8
----------------------------------------------------------------------------
Cash provided by operating activities 1,032 1,025 2,487 2,686
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash payments for capital assets,
excluding spectrum licences (711) (616) (1,971) (1,903)
Cash payments for spectrum licences - (12) (145) (2,002)
Cash payments for acquisitions (14) (5) (16) (10)
Real estate joint ventures advances
and contributions (5) (14) (28) (38)
Real estate joint venture receipts 50 95 91 97
Other - 3 (6) 4
----------------------------------------------------------------------------
Cash used by investing activities (680) (549) (2,075) (3,852)
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to holders of Common
Shares (274) (253) (798) (740)
Purchase of Common Shares for
cancellation (19) (140) (140) (402)
Issuance and repayment of short-term
borrowings (3) (399) - 1
Long-term debt issued 1,336 2,985 4,623 6,279
Redemptions and repayment of long-
term debt (1,403) (2,605) (4,186) (3,882)
Issue of shares by subsidiary to non-
controlling interest (1) - 291 -
Other (6) - (15) (9)
----------------------------------------------------------------------------
Cash provided (used) by financing
activities (370) (412) (225) 1,247
----------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash and
temporary investments, net (18) 64 187 81
Cash and temporary investments, net,
beginning of period 428 77 223 60
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Cash and temporary investments, net,
end of period $ 410 $ 141 $ 410 $ 141
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SUPPLEMENTAL DISCLOSURE OF OPERATING
CASH FLOWS
Interest paid $ (132) $ (115) $ (387) $ (329)
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Interest received $ - $ - $ 1 $ 3
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Income taxes paid, net $ (148) $ (71) $ (571) $ (249)
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Segmented information (unaudited)
Three-month periods
ended September 30
(millions) Wireless Wireline
2016 2015 2016 2015
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Operating revenues
External revenue $ 1,818 $ 1,767 $ 1,420 $ 1,388
Intersegment revenue 15 16 48 44
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$ 1,833 $ 1,783 $ 1,468 $ 1,432
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EBITDA(1) $ 759 $ 715 $ 372 $ 353
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CAPEX, excluding
spectrum
licences(2) $ 295 $ 209 $ 492 $ 414
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Three-month periods
ended September 30
(millions) Eliminations Consolidated
2016 2015 2016 2015
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Operating revenues
External revenue $ - $ - $ 3,238 $ 3,155
Intersegment revenue (63) (60) - -
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$ (63) $ (60) $ 3,238 $ 3,155
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EBITDA(1) $ - $ - $ 1,131 $ 1,068
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CAPEX, excluding
spectrum
licences(2) $ - $ - $ 787 $ 623
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Operating revenues
(above) $ 3,238 $ 3,155
Goods and services
purchased 1,426 1,394
Employee benefits expense 681 693
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EBITDA (above) 1,131 1,068
Depreciation 388 361
Amortization 127 110
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Operating income 616 597
Financing costs 129 106
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Income before income
taxes $ 487 $ 491
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(1) Earnings before interest, income taxes, depreciation and amortization
(EBITDA) does not have any standardized meaning prescribed by IFRS-IASB
and is therefore unlikely to be comparable to similar measures presented
by other issuers; we define EBITDA as operating revenues less goods and
services purchased and employee benefits expense. We have issued
guidance on, and report, EBITDA because it is a key measure that
management uses to evaluate the performance of our business, and it is
also utilized in measuring compliance with certain debt covenants.
(2) Total capital expenditures (CAPEX).
Nine-month periods
ended September 30
(millions) Wireless Wireline
2016 2015 2016 2015
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Operating revenues
External revenue $ 5,274 $ 5,161 $ 4,220 $ 4,124
Intersegment revenue 43 44 143 130
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$ 5,317 $ 5,205 $ 4,363 $ 4,254
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EBITDA(1) $ 2,308 $ 2,178 $ 1,152 $ 1,106
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CAPEX, excluding
spectrum
licences(2) $ 733 $ 684 $ 1,441 $ 1,238
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Nine-month periods
ended September 30
(millions) Eliminations Consolidated
2016 2015 2016 2015
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Operating revenues
External revenue $ - $ - $ 9,494 $ 9,285
Intersegment revenue (186) (174) - -
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$ (186) $ (174) $ 9,494 $ 9,285
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EBITDA(1) $ - $ - $ 3,460 $ 3,284
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CAPEX, excluding
spectrum
licences(2) $ - $ - $ 2,174 $ 1,922
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Operating revenues
(above) $9,494 $9,285
Goods and services
purchased 4,057 4,050
Employee benefits expense 1,977 1,951
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EBITDA (above) 3,460 3,284
Depreciation 1,158 1,069
Amortization 356 322
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Operating income 1,946 1,893
Financing costs 386 333
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Income before income
taxes $1,560 $1,560
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1. Earnings before interest, income taxes, depreciation and amortization
(EBITDA) does not have any standardized meaning prescribed by IFRS-IASB
and is therefore unlikely to be comparable to similar measures presented
by other issuers; we define EBITDA as operating revenues less goods and
services purchased and employee benefits expense. We have issued
guidance on, and report, EBITDA because it is a key measure that
management uses to evaluate the performance of our business, and it is
also utilized in measuring compliance with certain debt covenants.
2. Total capital expenditures (CAPEX).
Contacts: Media relations: Shawn Hall (604) 619-7913 [email protected] Investor relations: Paul Carpino (647) 837-8100 [email protected]
Source: Telus Corporation